In our continual race calling of the economy, economists have access to a host of economic indicators, from the price of pork bellies to Bolivian sugar exports.
But I bet if you told most economists they could only pick one as a proxy for the health of economies, it would be the jobless rate.
In the end, it all comes down to jobs.
It is HSC Economics 101 that the level of employment drives incomes, which in turn drives spending, which in turn drives business income, which in turn drives employment.
In this circular flow of income, it’s the decision whether to employ or not that drives the whole shebang.
And so good news from the US over the weekend, with the February US non-farm payrolls report showing the world’s largest economy created 236,000 jobs in the month.
This was well above the 125,000 jobs the US needs to create each month to simply keep up with population growth.
The US jobless rate fell from 7.9 per cent to 7.7 per cent, the lowest since President Obama moved the wife, kids and dog into the White House in January 2009.
Encouragingly, the jobs gains were widespread as retailers hired more — despite warnings from Walmart — and the construction sector generated 14,000 jobs — the highest since the onset of the GFC. The US housing sector is up off its knees and employing people again, which is a solid base for recovery.
The report was much stronger than economists had anticipated (they had looked for around 165,000 jobs).
And it comes despite the hike in payroll taxes from January that resulted from the midnight deal to avoid the “fiscal cliff”.
The numbers did show a 10,000 loss of public service jobs, which suggests the bureaucracy is bracing for budget cuts as a result of the US sequester spending cuts which kicked in from March 1.
All the strength was in the private sector — an encouraging sign that after fully six years of economic turmoil, American employers are regaining some of their lost confidence to grow and hire.
More jobs puts more money in pockets, meaning more money spent on retail and housing — and the circular flow of income is restored.
With borrowing costs close to non-existent, businesses are expanding their workforce as the US Federal Reserve had hoped. Talk has begun already of a “fedxit” — the day when the Fed will judge enough has been done to ensure the sustained recovery in jobs it seeks. But economists judge that premature, needing to see a jobless rate of about 6.5 per cent before we can talk about policy tightening.
And even then, it is possible the headline jobless rate is overstating the strength of recovery.
You see, recoveries in headline jobless rates can be deceptive if achieved by more people dropping out of the chase for work altogether.
And so a word of caution.
In the US, as in Australia, the labour force participation rate is falling.
In the US, it has slipped to a 32 year low of 63.5 per cent in February. Back in 2007, it was above 66 per cent.
If the participation rate had not fallen as much as it has over the past year, the US jobless rate would be around 8.3 per cent.
The ranks of the long term unemployed in the US (longer than 6 months) also jumped 89,000 to 4.8 million in February. The average duration of unemployment rose to 36.9 weeks from 35.3 weeks.
For those at the pointy end of the labour market, for older workers or with lower skills, it’s still a tough ask to get a job.
And so many are simply giving up, masking the true weakness in the market.
The Dow Jones may have soared to pre-GFC highs. But the jobs market is a fair way behind.
According to the Hamilton Project’s Jobs Gap Calculator, it will still take 101 months to get back to pre-Great Recession employment levels (assuming population growth, no recessions and monthly jobs growth of 191,000 — the average of the past three months).
So that’s still eight years away.
America is still nursing a jobs gap, on this measure of around 11.4 million jobs — 5.2 million from jobs lost since 2007 and another 6.1 million from jobs that should have been created in the absence of recession.
This cyclical weakness in the labour market is coinciding with a structural ageing of the population, meaning we must be cautious in reading jobs reports and relying too much on the headline jobless rate as an indicator of job creation.
As more baby boomers reach retirement age, if they find it too hard to get a job, they have the option to take an earlier retirement than they had planned.
This means they drop out of the labour force, and don’t show up on the unemployment queue.
But it is a real reduction in economic activity from what we have been experiencing.
The same phenomenon is happening in Australia.
In his weekly Economic Note, the Treasurer, Wayne Swan, yesterday cited Treasury analysis which has concluded that 80 per cent of the decline in Australia’s participation rate over the past two years can is due to ageing.
Don’t be confused. The actual participation rate of older workers has risen in recent years — as older workers work longer to top up damaged retirement nest eggs.
But because as a group older workers have a lower participation rate, their appearance in bigger numbers has been a drag on total participation.
Thursday’s jobs report in Australia is likely to show a continued weakness in participation, which is keeping a lid on the jobless rise.
It’s good to the extent that more of the people who are looking for work can find it.
But it does imply a structural downward step in the economy’s productive potential, as the proportion of the working aged population shrinks.
Markets may be excited about a return to the pre-GFC norm, but economists are beginning to realise things may never be the same again.
Old age: it catches up with all of us in the end.