The Federal Reserve’s modern statutory mandate, as described in the 1977 amendment to the Federal Reserve Act, is to promote maximum employment and stable prices. These goals are commonly referred to as the dual mandate. High levels of employment are key to a vibrant economy. Maximum employment promotes business investment, thus boosting productivity and the economy’s long-run growth potential.
A key indicator in evaluating the strength of the labor market for the Fed is the unemployment rate. The Bureau of Labor Statistics (BLS) collects data every month from the payroll records of about 119,000 business and government agencies, representing approximately 629,000 individual worksites. This payroll survey (also known as the establishment survey) provides information on employment, hours, and earnings of employees on nonfarm payrolls. The active sample includes approximately one-third of all nonfarm payroll jobs.
The BLS also conducts surveys of household expenses each month. This household survey provides information on the labor force, employment, and unemployment. It is a sample survey of about 60,000 eligible households conducted by the U.S. Census Bureau for the BLS.
For both surveys, the data for a given month relates to a particular week or pay period. In the household survey, the reference period is generally the calendar week that contains the twelfth day of the month. In the payroll survey, the reference period is the pay period including the twelfth day, which may or may not correspond directly to the calendar week.
The numerous conceptual and methodological differences between the household and payroll surveys result in important distinctions in the employment estimates derived from the surveys.
What Are the Differences?
The household survey includes agricultural workers, self-employed workers whose businesses are unincorporated, unpaid family workers, and private household workers. The payroll survey excludes these groups.
The household survey includes people on unpaid leave among the employed. The payroll survey does not.
The household survey is limited to workers 16 years of age and older. The payroll survey is not limited by age.
The household survey has no duplication of individuals, because individuals are counted only once, even if they hold more than one job. In the payroll survey, employees working at more than one job and thus appearing on more than one payroll are counted separately for each appearance.
Warning Sign, or Easy Explanation?
The May 2024 jobs report showed some discrepancies between the household and payroll surveys. The jobs report for nonfarm payrolls was broad-based, with a gain of 272,000 jobs for the month.
Based on a polling of households and a smaller sampling than that of the payroll survey, the household survey posted a significant decline in employment of more than 400,000 in May. Based on this decline in employment in the household survey, the unemployment rate ticked up to 4.0% from 3.9%. While this is still very low by historical standards, unemployment has crept up from the 3.4% low reached in January 2023.
The May 2024 data has widened the substantial gap between the payroll survey report and the household survey measures of 2023-24 job growth. These two measures of unemployment have diverged by over two million jobs in the past twelve months. The household survey measure of employment has been flat for roughly a year — with declines seen in five of the eight months from November 2023 — while the payroll survey has shown more than 250,000 new jobs added on a monthly average.
Slight discrepancies between the two closely watched surveys are normal, but rarely has the gap been so wide. One survey suggests a robust economy that is coping just fine with high interest rates; the other survey suggests that growth is rapidly decelerating.
It appears that the household survey shows a weaker jobs market than the payroll survey. The household survey has tended to be more accurate at important turning points in the cycle (in both directions). But over time, the payroll survey has a better track record.
One factor stands out. To get its employment figure from the household survey, the Labor Department calculates the share of the population that is working and then applies it to population estimates from the Census Bureau. The source of the discrepancy might be that this population estimate is off, due to surging immigration.
Many economists believe that immigration surge is being picked up in the payroll survey but not the household survey. The household survey has undershot job growth for this reason before. In the late 1990s, as undocumented immigration into the U.S. rose, a big gap developed between the estimates for job growth between the payroll survey and the household survey. After the 2000 census captured the immigration increase, the Labor Department concluded that household survey understated employment by about 1.6 million people.
Katharine Abraham, a University of Maryland economist who was the commissioner at the Bureau of Labor Statistics for much of the 1990s, cautions that the current gap might reflect more than a discrepancy in population measures. Her research has found the payroll survey tends to show stronger job growth when the labor market is strong, and more pronounced declines when it weakens.
The BLS said that 206,000 jobs were added in June, slightly ahead of expectations. However, the unemployment ticked up to 4.1%, a sign of a slack in a labor market that has already shown some gradually slowing. The report provides further evidence that the labor market appears to have come into better balance.
Conclusion: Wait and See
As noted, the Fed’s two mandates are low inflation and full employment. As the Fed raises rates to slow inflation and the rate hikes start to affect other areas of the economy, the economy should slow and thus unemployment should increase. The trick is to keep rates at a level that brings down inflation and slows the economy but not enough that the economy doesn’t go into a full-blown recession (negative growth for the economy and high unemployment). Negative growth rates and economic contraction also mean a decrease in real income, higher unemployment, lower levels of industrial production, and a decline in wholesale or retail sales.
The Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and subsequent inflation, reducing purchasing power and undermining the sustainability of the economic expansion.
At Bowen Asset Management, we believe the data suggests the economy is slowing, with higher interest rates starting to filter through to businesses and consumers. With much of the recent data coming in softer than economists forecasted, the prospect for Fed rate cuts has increased. But expectations for rate cuts in 2024 remain tempered. In January 2024, forecasters priced seven cuts into the futures markets. Instead, we have had zero cuts. We believe the Fed still does want to make one or two cuts this year, possibly in September, or likely even later. Any cut could slow the rate of unemployment.
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