Professor Siegel's Weekly Commentary Archive
Implications of Unemployment Rate Trends
August 7, 2023
The employment report showed a continued softening of payroll trends, with payroll gains falling short of expectations and downward revisions to previous months. The household survey was a bit stronger and led to a slight reduction in the unemployment rate; both the official rate and broad-based rate (U6 unemployment rate) ticked down to 3.5 and 6.7%, respectively.
One noteworthy aspect of Friday’s unemployment report is that hours worked ticked down one tenth, tying the cyclical low reached a couple of months ago. Total hours worked is in a definite downtrend this year, marking a slowdown in labor demand.
There are important implications to these trends. Last year we had strong gains in payroll, but very poor growth of GDP; the cause was a collapse of productivity that rivalled historical records.
Earlier this year I speculated that the opposite may happen in 2023, and so far, this scenario is unfolding. Earlier last week we received a preliminary estimate of second quarter productivity of +3.7%, far above expectations, plus a major upward revision to first quarter productivity. In 2022, productivity sagged by 2%, the most since World War II. So far this year, productivity is moving up at a 1.3% pace, higher than the long-term average.
It is this burst in productivity that can give us robust GDP numbers despite declining payrolls and hours worked. This is good for real wages and corporate profits. That is why I am not worried that the average hourly earnings reported ticked up a bit more than expected. If wages rise because of productivity, that is not inflationary.
I would also comment on Fitch’s downgrade of U.S. Treasuries. It is as silly as the S&P downgrade in 2011. The U.S. government should never default on its debt because that debt is denominated in dollars, which can always be printed by the Federal Reserve. (What those dollars might be worth in purchasing power is another story.) For this reason, there can be no entity, foreign or domestic, that should have a higher rating for dollar denominated debt than the U.S. government. Recall the ten years that followed the S&P downgrade led to the greatest demand, and therefore lowest interest rates ever paid on U.S. debt. We do have a long-term deficit problem, but currently deficits do not prominently figure into the yields on long-term treasuries.
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