What the Unemployment Rate Doesn’t Tell Policymakers Can Hurt Us
Last week the NH Labor Market Information Bureau released the NH jobs report for May and as usual all of the attention focused on NH’s low (2.7 percent) unemployment rate. The more significant story was the April to May decline of 4,000 payroll jobs in the state.
Private sector jobs in NH were lower by 3,400 in May, the largest one month decline since 2008 – with one exception – a month in 2014 when workers at the Market Basket grocery chain left their jobs in support of their ousted CEO. May 2016 job losses were an out sized drop for any month of seasonally adjusted data (a decline of that size would more likely be seen in the not seasonally adjusted data where large changes in employment occur annually during certain months of the year). I am inclined to attribute some, but not all, of the drop in NH’s May employment to problems with seasonal adjustments and other statistical issues. Still, the May data marks the first time since 2011 that a three month moving average of private sector employment growth in NH has been negative.
For some added context on the NH payroll employment numbers I wait for a release from the U.S. Bureau of Labor Statistics, usually about one week after NH releases its state’s job numbers. That monthly report provides employment, unemployment, labor force and other labor market data for all 50 states. Here is a bit of the context provided in the June 20th release from the U.S. Bureau of Labor Statistics:
“In May 2016, four states had statistically significant over-the-month decreases in nonfarm payroll employment and three states and the District of Columbia had significant increases. The job losses were in Tennessee (-13,400), Michigan (-12,700), New Hampshire (-4,000), and Montana (-2,700). In percentage terms, Montana and New Hampshire had the largest declines (-0.6 percent each), followed by Tennessee (-0.5 percent) and Michigan (-0.3 percent).”
The term “statistically significant” decline in employment is important. Twenty seven states experienced declines in nonfarm payroll employment in May but in only four of those states was the decline deemed “statistically significant,” meaning that the decline was large enough for the BLS to be at least 90% certain that the change in employment did not fall within the margin for error of the employer survey on which the employment estimates are based.
It is not wise to be too concerned with one month’s job report. Whether the May job growth number is real or illusory and the product of statistical anomalies, the numbers for NH still should have attracted more attention (than a 0.1% uptick in the unemployment rate) from the media and especially from lawmakers and public officials. The May job growth number is certainly more noteworthy than a slight uptick in the state’s unemployment rate that was the focus of most media reports. As I noted in my previous post, employment growth nationally and in NH is going to slow and one bad month is not reason to panic. But NH’s year-over-year percentage increase in private sector employment took a big hit with the May jobs report and the state’s ranking among states on private sector job growth did as well. Private employment growth in NH has been on a solid pace for more than a year but with the May data NH moved from the top third to the bottom half among states on year-over-year private sector job growth.
Public sector job cuts continue to be a drag on NH’s total nonfarm job growth, shedding about 2,500 jobs between May of 2015 and May of 2016, by far the largest percentage decline of any state in the nation.
Still, while the May jobs report was troubling, initial unemployment claims are a very good leading indicator of economic activity and they remain subdued in NH and have yet to suggest a significant downtown in either the U.S. or NH economies. The May jobs report also showed a continuation of the recent trend of solid labor force growth.
Implications for State Revenue
My primary concern about the May jobs report for NH, and with monthly jobs reports for NH in general, is how little attention payroll employment numbers get from policymakers and how much attention and importance is given to the state’s unemployment rate. The state will begin crafting its two-year budget this fall and solid revenue gains over the past year and a budget surplus are building pressure for substantial increases in state spending. This isn’t a commentary on the merits of specific spending proposals (I will save that for later posts) just a caution that the fiscal environment into which spending proposals will be entered can change and the need to recognize that change as far in advance as possible. I would feel more comfortable about the upcoming budget process if NH’s weak May jobs number, and the possibility that weaker job growth will continue, were at least acknowledged by policymakers, state agencies, and the media. I want to know that there is someone in NH’s wheelhouse focused on the horizon and not on our wake. I understand the appeal of the unemployment rate as a single, intuitive metric that summarizes economic conditions but the unemployment rate is a lagging indicator of labor market and economic trends. For policymakers and anyone who needs to assess the near-term economic outlook, using the unemployment rate as a guide is a bit like driving using the rear view mirror. The unemployment rate is an important economic indicator that says a lot about current economic conditions, it is just not that useful for forecasting purposes. Moreover, NH’s demographics (fewer individuals in demographic groups that typically have high rates of unemployment) mean that the state will almost always have a relatively lower unemployment rate than the U.S.. Too frequently that leads lawmakers and others in NH to assume the state’s economy is performing better than it actually is and better than the U.S. economy.
Business taxes are a big reason that NH revenues have outperformed expectations this fiscal year, accounting for almost two-thirds (or $61.4 million) of the $99.4 increase in traditional taxes and fees over FY2015 during the first 11 months of fiscal year 2016. Focusing on changes in private sector payroll employment and wage growth is especially important for lawmakers in the Granite State and especially important as we head toward a budget making year. As a lagging indicator of economic activity NH’s unemployment rate will remain low, even as the economy slows.
If lawmakers focus too much on NH’s unemployment rate in their assessment of state revenue trends they risk delaying recognition of turning points in the NH economy and thus changes in state revenue trends. Private sector employment and payroll growth slow before significant changes occur in the state’s unemployment rate and private sector employment growth is a better indicator of trends in NH business tax revenue than is the state’s unemployment rate. So the next time a public official brags about NH’s unemployment rate, ask him or her how many jobs were added in the state during the last month.