The economy is moving forward, but the road it's taking is an uneven one, to put it mildly. Combined with the tendency of analysts to focus on the short-term — i.e., next month — we have a situation where they can make an argument for success or failure of a given economic policy, leaving the average citizen thoroughly confused.
Most economists would agree that neither the White House nor Congress can do much to impact the economy over the short term. Nonetheless, we still see politicians engaging in plenty of finger-pointing or “high fiving” when monthly economic data is released.
During the first part of August, pundits were forecasting that job-growth numbers for July would come in at 220,000 or more. Where did they get that figure? Well, it was based on a number of things: the previous month's activities, the level of backlog for goods and thus amount of production increase needed to absorb it, seasonal patterns for each of the major sectors of the economy, and demand for labor in the service sector.
The trucking industry also played a role by telling the public it couldn't hire fast enough to keep up with demand. But that did not turn out to be the case. Fleets, as well as other companies, were able to hire fast enough. So while employment levels in different industries may have shifted, the overall demand for jobs in July was actually much lower than the prediction. In fact, the preliminary job growth number came in at just 35,000.
The difference between 35,000 and 220,000 jobs is not insignificant. But let's look at what these numbers have been over the previous six or seven months. Going back to December, the economy has added an average of 158,000 jobs a month in the private non-farm sector. However, these numbers have ranged from a low of 8,000 (December) to a high of 339,000 (March). The average change in the number of jobs added each month was 121,000. Forecasting these numbers is not for the faint of heart.
But if we're all looking at the same set of numbers, we should be able to determine the pattern of change. Let's face it,economists and market analysts are at their best when making long-term predictions — assuming they take historic market forces into consideration.
What do we know about the current labor market? We know that increased output leads to increased employment. We also know that productivity gains will eat into the number of new jobs that are created. On the other hand, if an industry or company is already operating at or near peak efficiency, it will need to hire relatively more workers to increase output. In addition, we know that all sectors of the economy don't grow at the same rate, nor do they need the same amount of labor for each dollar of output.
But we can't take all of this into account when we're trying to forecast demand for labor. We can identify, in the aggregate, the marginal amount of labor needed for a marginal increase in output, based on historic activity. However, we don't know with any degree of accuracy how inefficient we are or how rapidly we can increase productivity. If you ask equipment and component suppliers in the trucking industry, though, they'll tell you with certainty that we produce more now with a lot less labor than we did in the past.
It should be no surprise that as we get smarter about what we do, the historic view of employment requirements becomes less accurate. The politicians will have a field day explaining the successes or failures of their efforts. But in reality, it's the worker bees who control the bulk of the demand for labor.
The bottom line? Beware of the pundits — they don't always have their ducks in a row.