This morning’s employment report showed an old-normal, wide-spread increase in payroll employment of 288,000, with nice upward revisions in April and May totaling 29,000 jobs. This raised the average employment gains over the past three months to 272,000. The unemployment rate in June fell to 6.1 percent from 6.3 percent in April and May.
The decline in the unemployment rate in June was mostly for the “right” reasons—more employment—rather than for the “wrong” reasons—a decline in the labor force participation rate. Labor force participation has held steady at a low of 62.8 percent for the past three months. The employment to population ratio, at 59.0 percent, has actually increased by 0.3 of a percentage point over the past year.
In speeches in the late 1990’s, I used to describe the “new paradigm” economy with the example of boiling a frog. The frog doesn’t jump out of the boiling water because its temperature rises so gradually that the frog didn’t realize his paradigm was shifting. I believe the historic changes over recent years have had a similar effect on me. How else can I explain feeling comfortable with several years of near-zero interest rates and massive pre-announced open market security purchases? The employment numbers this morning made me wonder if such extraordinary measures continue to be needed. How much harm could a few months of ¼ point increases in the Fed Funds rate do?
The markets have also accepted the new normal as normal and would no doubt react badly to such a change earlier rather than later. We got a preview of that with the “taper tantrum” last year. But, so what? Surely, that would be temporary as the improvements in the economy sink in. The stock market reacted positively to good news this morning. If that wears off during the day, it will probably be because it too is having second thoughts similar to mine, and expects normalization earlier rather than later.