Musings: Energy, Unemployment And The Health of The US Economy
This opinion piece presents the opinions of the author.
There is nothing more important in determining the outlook for a nation's energy demand than understanding the health of its economy. This is especially true for the United States today as it faces a presidential election focused on dramatically different economic and governing philosophies of the candidates and their views about how fast the economy may grow and, in turn, how much energy the nation will need. Most people are aware of President Barack Obama's "all-of-the-above" energy strategy, which provides a number of popular talking points about him being open to all forms of energy while campaigning, but in reality means only a few energy sources will be favored. Those favored energy sources seem to be only "green" ones. On the other side of the issue is the Republican standard-bearer, Mitt Romney, who is advocating for increased development and use of domestic fossil fuel resources while mandating that very expensive green energy sources need to achieve commerciality on their own and without government mandates and subsidies.
America's domestic oil and gas production is growing dramatically suggesting to some students of the energy business that the country is on track to eventually achieve self-sufficiency. The definition of self-sufficiency seems to mean different things to different people, but on balance it suggests the U.S. will be importing significantly less energy than in the recent past and may actually begin exporting meaningful energy volumes assuming government regulatory barriers are removed and no new ones erected. Just how much energy the country may wind up exporting is an open question, since it depends on the growth of our productive output, our increased consumption and legal barriers being lowered.
The answer to the question of how much energy consumption may grow is tied to the economic outlook. A key ingredient for predicting the economy's growth rate lies in understanding how the health of our labor market will influence future activity. The traditional measure of the labor market's health is the unemployment rate, which, following the latest monthly employment report showed the U.S. economy with 12.5 million unemployed workers, or an 8.1 percent unemployment rate. Despite the high rate, the unemployment rate for August improved by two-tenths of one percentage point from what was reported in July. Compared to a year ago, the unemployment rate has declined by one full percentage point, but part of the improvement is a reflection of changes within the dynamics of the American labor force combined with some private sector employment growth. We will examine some of these labor force dynamics later in this article.
Following a robust jobs creation period from the end of the fourth quarter of 2011 through spring of 2012, the April through August reports, with the exception of July, have been extremely weak for new job creation. If we look just at the last three months, the economy was only able to create an average of 94,000 new jobs per month. That compares with a monthly average of 99,000 new jobs created in the prior three-month period. Interestingly, the pattern of weak job creation in this period seems largely to have been mirrored in 2011. That year, the weakest months for new job creation were May through August. Is there something about a summer slump for the economy?
On the campaign trail, President Obama makes the claim that his administration has added 4.5 million new private sector jobs over the past 20 months. He fails to point out that during this same time period the public sector has shed half a million jobs, netting him only four million total new jobs. Today, there are 261,000 fewer jobs than when President Obama was sworn into office. Compared to election eve 2008, there are 1.7 million fewer jobs and 4.7 million fewer than from the period immediately prior to the financial crisis.
One of the major changes in the domestic labor force has been the decline in the overall participation rate. Today, the rate is 63.5 percent, which has declined steadily since it peaked at 67.3 percent in April 2000. As shown in Exhibit 13, the civilian labor force participation rate has essentially returned to where it was at the beginning of the 1980s. If we go back just to 2007 before the financial crisis, the drop in the labor force participation rate means there are 4.6 million fewer jobs. Most of those who have left the labor force have gone back to school or on disability with a small portion electing to retire. The 2.1 million workers returning to school will re-enter the labor force and will likely drive the unemployment rate higher as they do.
The most dramatic change in labor force dynamics has been the long-term increase in participation by women and the corresponding long-term decline of men. Exhibit 14 shows that since the 1950s, the participation rate of men (red line) has steadily declined hitting a new low. Women, on the other hand, increased their participation (green line) steadily until about 2000 when the rate stabilized, but in the past few years due to the financial crisis and the recession, their participation rate has declined, too. An explanation of what is happening with labor force participation is that we have been witnessing the impact of early retirements of the baby boomer generation coupled with a growing portion of the population deciding to stop seeking work and many more people applying for long-term disability status.
One problem with the argument about the early retirements of the baby boomers is that the participation of those 55 and older continues to increase. As shown in Exhibit 15 (next page), the number of workers 55 years old and older (blue line) has risen steadily since 2007, although the increase has been volatile in the past few months. The number of older workers rose throughout the recession while overall employment fell. We think the continued growth in older workers is a contributory factor retarding the growth of the overall labor force participation rate. Older workers are not giving up jobs that would have been open for younger workers. It seems employers value the skills and knowledge of older workers, a phenomenon supported by a recent survey of employer attitudes toward older and younger workers that pointed out the lack of verbal, writing and dedication characteristics among younger workers, which is holding down their employment opportunities.
This decline in labor force participation partially explains why the pace of the labor market recovery is the worst since the 1930s. As shown in Exhibit 16 (next page), the percentage change in total employment has been plotted for every recession since the beginning of the 1970s. The lines show how employment changed from the prior peak in activity.
To understand the blue line (current cycle), the zero month would be when the recession started that ended 18 months later in June 2009 (six months after President Obama was inaugurated). The remaining 38 months reflect the period from June 2009 to August 2012. As that blue line shows, this recovery has been extremely weak and its pace (reflected by the slope of the line during its upturn) continues to be weak.
Part of the problem for the economy is that it still depends upon consumer spending for about 70 percent of its activity. With labor markets remaining challenged, which is reflected not only by the high unemployment rate but also by stagnant average hours worked and average hourly earnings for the typical American worker, consumer incomes are not growing. Without expanding incomes, the impact from lost wealth in the form of falling home prices due to the fallout from the collapse of the housing market has further stressed American families. They are struggling to meet their growing gasoline and food bills while trying to figure out whether they will have enough money to educate their children and to retire. The state of today's economy and our work force leaves open the question of what the catalyst might be to boost consumer spending and thus stimulate economic growth. Faster economic growth would lead to greater energy consumption.
The importance of the need for faster economic growth was highlighted by the Federal Reserve's recently announced new monetary quantitative easing (QE) strategy. The Fed plans to buy $40 billion of mortgage-backed securities per month indefinitely until the agency believes the economic recovery is strongly established. In the Federal Open Market Committee's (FOMC) statement, it stated the following: "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability." This statement clearly acknowledges the importance of improving the labor market as the key to a sustainable economic recovery.
The chart in Exhibit 17 comes from a report posted on the blog, Our Finite World, authored by Gail Tverberg. The report is titled "The Close Tie Between Energy Consumption, Employment, and Recession." What Ms. Tverberg found was that there is a very strong correlation (R2 = 0.98) between changes in total U.S. employment and energy consumption. This would suggest that if the U.S. labor force continues to struggle adding jobs as it has for the past several years, it will be difficult to see any meaningful growth in energy consumption.
President Obama campaigns on the promise to grow the economy and add more jobs, although he seems not interested in spelling out what changes to his policies and actions will enable this promise to be met. Mr. Romney, on the other hand, says he has a plan to add 12 million new jobs over his term in office if elected president based primarily on exploiting domestic energy resources and reducing regulation and taxes to allow American businesses to grow. Many Democrats and economists scoff at Mr. Romney's job growth projection, however they fail to realize that between 1996 and 2000, the economy did add 12 million new jobs, at a time when the labor force was 20 percent smaller than it is today.
At issue for many of these skeptics is their belief that the U.S. economy has structural problems in the labor market that prevents the hiring of many of the country's 23 million currently unemployed and underemployed workers. They point to the existence of a large number of job openings being posted by American businesses and claims about the large number of new engineers and scientists needed. But that shortage argument has been around for decades – only the numbers seem to change. The concern appears to be growing due to the impending retirement of baby boomers, but many of the members of that generation are staying in their jobs longer creating an impediment for younger workers. We plan to visit the structural labor force issue, especially as it is reflected in worker education levels, in a future Musings.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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