Fairy-tale ending?

Road to US jobs recovery leads to parts unknown

Instead of a Goldilocks recovery, the US turnaround is becoming a Hansel and Gretel one. Another 248,000 additions to non-farm payrolls in September brought the jobless rate below 6 per cent for the first time since 2008. So-called full employment isn't far off. Except that the participation rate and wages are still falling. The Federal Reserve's balance sheet has company in uncharted territory.

The headline numbers are welcome. A bleak August was revised upward by 69,000 positions and September's gains were higher than the recent trend, according to figures released on Friday by the US Bureau of Labor Statistics. The unemployment rate also slipped 0.2 percentage point to 5.9 per cent, making the decline a full two percentage points in less than two years. At this rate, it would dip below 5 per cent, the level at which economists generally see equilibrium in demand for work, by mid-2015.

The details are disquieting, however. The proportion of the population either working or looking for work dipped yet again, to 62.7 per cent. It's the lowest level since October 1977, when far fewer women had entered the workforce. Meanwhile, the length of the average work week edged up and hourly earnings fell yet again.

This combination suggests the value of labour is declining. There are more jobs, but only at lower wage rates, while the long-term unemployed have a diminishing chance of getting them. So even if the unemployment rate does reach the five per cent nirvana number next year, the country won't experience the same vibrant labour market of past economic cycles.

That leaves the jobs recovery in unfamiliar waters, as is the Fed's balance sheet. The unprecedented nature of its monetary policy stimulus has left the central bank holding $4.5 trillion of assets. Meanwhile, the federal budget deficit hovers around $500 billion, higher than in any peacetime year before the financial crisis.

Like the story made famous by the Brothers Grimm, the US economy is lost in an unknown forest. Hansel and Gretel survived. Honest economists should now confess that they do not know how this economic fairy tale will play out.