Like the current NBA championship series between the Warriors and the Cavs, an epic battle is playing out in the U.S. economy. How could the U.S. economy generate healthy jobs data every month at the same time it posted anemic GDP numbers? How could we keep churning out new jobs at a robust clip when the economy itself wasn’t putting up strong numbers? Would the jobs data also languish like the GDP numbers or would GDP accelerate to parallel jobs growth? The two series couldn’t continue going in opposite directions. 

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Jobs Data v GDP Data: Economy’s Warriors v Cavaliers

Tue Jun 7, 2016

The whole world seems to be following the titanic battle between Stephen Curry’s Golden State Warriors and LeBron James’ Cleveland Cavaliers for the National Basketball Association Championship.

But a big contest has been playing out on another court in recent months, pitting the Department of Labor’s monthly jobs data against the Department of Commerce’s quarterly GDP data. The first records new jobs added each month while the other tracks the economy’s total output of goods and services.

Outside the paint and pouring in 3-pointers has been the DOL’s jobs data—slam-dunking 200,000 or so new hires almost every month for years. Languishing in the backcourt have been the GDP numbers—around 2 percent annual growth for five years but stumbling in late 2015 to 1.4 percent and so far in 2016 to a mere 0.8 percent.

How could the U.S. economy generate healthy jobs data every month at the same time it posted anemic GDP numbers? Put another way, how could we keep churning out new jobs at a robust clip when the economy itself wasn’t putting up strong numbers? Would the jobs data also languish like the GDP numbers or would GDP accelerate to parallel jobs growth? The two series couldn’t continue going in opposite directions.

Like an injury to a star player, we got a hint who might win this match when the Labor Department reported on Friday that the U.S. created only 38,000 new jobs in May, the lowest monthly figure since September 2010. While this disappointing number could be revised in coming months it nevertheless shocked markets, prompting speculation that the Federal Reserve might postpone an interest rate hike expected this month.

The nation’s unemployment rate dipped to 4.7 percent, which is “full employment,” but it looks like this was due entirely to a huge drop in labor force participation, as some 458,000 people essentially dropped out of the workforce.

It’s impossible to predict whether the Warriors or the Cavaliers will bring home the Larry O’Brien Trophy this year, but the latest employment picture suggests that jobs data will lose the jobs-GDP contest—for two reasons.

Number OneThe monthly employment figures have been trending downward recently. In 2014 the average monthly job gain was about 250,000. In 2015, about 230,000 new jobs were created every month. But beginning in 2016, new hiring downshifted to an average monthly gain of only 159,000 and to 116,000 over the past three months, capped by May’s meager 38,000.

Number TwoJobs data are what economists call a “lagging indicator,” meaning that they typically follow “leading” statistics like GDP, consumer credit or exports. Sooner or later, therefore, monthly job growth numbers will synchronize with quarterly GDP data—poor economic performance will ultimately drag down jobs and the unemployment rate will start to rise.

Clearly the key here is economic growth. The Federal Reserve’s easy money, zero-interest rate policy may have prevented a depression but has not stimulated healthy economic growth. Fiscal policy too has been stimulative, with this year’s budget deficit hitting a half-trillion dollars and total public debt held by the public now exceeding $14 trillion and climbing every day.

With the last recession officially ending in June 2009, the U.S. has been in slow but steady economic recovery now for exactly seven years. In a best-case scenario economic growth will pick up again to the 2.5-3.0 percent range and jobs data will correspond. In a worst-case scenario GDP growth will remain sub-par at below 1 percent and May’s jobs data will become the rule rather than the exception.

But it’s too early to tell and we must await the incoming data. One poor monthly jobs report shouldn’t set off alarm bells. Even LeBron James can have an off night. And just as Las Vegas bookmakers advise not to bet against the Golden State Warriors, LeBron and I would advise not to bet against the U.S. economy.