The October 7 jobs report stated the U.S. economy added a respectable 156,000 jobs in September, while the headline unemployment rate crept up to 5 percent from 4.9 percent in August. Though this gain is a welcome sign of a still-healthy economy, it demonstrates a slowing trend. Is anemic economic growth a temporary phase in the traditional business cycle or has something more fundamental changed to make slow growth permanent?  

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September Jobs Report: Two Reasons Behind the Downshift

Mon Oct 24, 2016

In its jobs report issued Oct. 7, the government announced that the U.S. economy added a respectable 156,000 jobs in September, while the headline unemployment rate crept up to 5 percent from 4.9 percent in August. Though this gain is a welcome sign of a still-healthy economy, it nevertheless continues to demonstrate a slowing trend.  

The nation’s workforce, which includes both the employed and the unemployed, grew by a whopping 3 million since September 2015 and by 444,000 last month alone. This partly explains why the unemployment rate blipped up even as 156,000 new jobs were added.

Two years ago, monthly job gains averaged 229,000; so far this year the average has been 178,000. The pace of monthly gains appears to have downshifted as the months have passed. In addition, the economy seems to have maxed out on its potential to drive the unemployment rate below the 4.9-5.0 percent range for a couple of reasons including:

  1. New job creation, like a giant magnet, seems to be pulling workers off the sidelines and back into the labor force.
  2. Secondly,the unemployment rate appears stuck in the 5 percent zone is that the economy itself can’t seem to get out of second gear. The Commerce Department’s Bureau of Economic Analysis reported September 29 that second quarter GDP rose at an annual rate of only 1.4 percent while first quarter GDP growth was clocked at a mere 0.8 percent.

In other words, the economy is growing, but not fast enough to push the unemployment rate lower as new jobseekers enter the workforce.

This slow-growth economy was confirmed by the Federal Reserve Board on September 21, when it issued its latest projections. The so-called “median” GDP forecast for the years 2017-2019 is now 2.0 percent, 2.0 percent and 1.8 percent respectively. And the “longer run” forecast is for only 1.8 percent annual real GDP growth.

These projections are vital because the Fed, mindful of its dual goal of price stability and maximum employment, sets interest rate policy to stimulate economic growth. The Federal Reserve’s zero interest rate policy succeeded in bringing the unemployment rate down from its 2009 peak of 10 percent but economic growth seems to have plateaued at barely 2 percent, well below the 3 percent-plus average since the 1950s.

The big question is, is anemic economic growth a temporary phase in the traditional business cycle or has something more fundamental changed to make slow growth permanent?

Former Treasury secretary and Harvard University president emeritus Lawrence Summers has coined the term “secular stagnation” to describe this longer term slow-growth phenomenon—an economy stuck in second gear.

Only time will tell, of course, whether Mr. Summers is correct that the U.S. and other nations have arrived at some “new normal” stationary state with all that implies for wage growth, income inequality and shared prosperity. It’s also possible that the U.S. is experiencing an unusually long hangover from the deep 2008-2009 Great Recession and that a return to robust growth is just around the corner.

Meanwhile, with Election Day 2016 less than a month away, the job market still looks healthy—we’ll take 156,000 new jobs created in a single month anytime.