March was a good month for jobs growth in the United States and, now that April is in the books, it appears that the job growth spurt is continuing to stoke the economy, spurred by the improvement in the housing market. There is, however, some dark cloud looming on the horizon that could put a chill on growth hopes.
Employment and housing construction are the twin engines of the American economy. Job growth means more money in circulation, more sales, and continued growth. Residential construction projects also create well-paying construction employment, but the construction of additional privately owned homes also means more tax revenue for cities and towns, and further stimulation of local economies.
The Human Inventory
The U.S. added 288,000 jobs to the economy in April following 190,000 slots that were added in March, beating economists’ predictions of 210,000 for April and driving the unemployment rate down to 6.3 percent. The new positions included 32,000 well-paid construction slots, as well as 35,000 lower-paying retail openings, creating a brighter picture for the overall economy. That is good news, but it may not be good enough to complete the renovation of the economy. The Class of 2014 is coming to a job market near you, looking for work.
The Dark Cloud Inside the Silver Lining
There is a dark cloud inside the silver lining of these job growth figures: a staggering 806,000 Americans dropped out of the labor force in April alone who have stopped looking for work, perhaps permanently. Some of these people have reached retirement age and are in the process of pulling the plug. Others are on disability, but a significant number of these missing workers simply could not find work and have given up the search effort. They are joined by another group of missing American workers: only 62.8 percent of the American workforce is actually either working or looking for work, leaving 37.2 percent unaccounted for, the highest percentage of “missing” workers since 1978.
Here Comes the Class of 2014
Against that backdrop, according to a report from the Bureau of Labor Statistics, 1.65 million American college students are going to hit the bricks by the end of next month, with their recently inscribed degrees in hand, looking for work.
If all of those students actually injected themselves into the job market, the economy would have to generate 137,500 new positions per month, over and above current job growth, just to keep pace with the demand for employment. Since that is not going to happen, a lot of them are not going to have any jobs to go to come September because the economy cannot grow fast enough to absorb them all as quickly as they would like to be absorbed.
In the meantime, June grads are being advised to go directly to graduate school, if possible, and that may be good advice. Employment consultants generally advise promising graduates not to spend two years working outside their intended fields on the grounds that employers often prefer to leapfrog over them to cherry pick from the cream of the fresh crop of June grads just coming out of school.
In 2013, 18 percent of the college graduates reporting went directly to graduate school but 43 percent of those who had graduated in 2011 were seeking graduate school placements in order to get better jobs. More than one-third of the recent graduates from the past three years are reporting that they were making $25,000 or less.
Graduate school may not be the Holy Grail of employment, either. Year over year, graduate school enrollments have been decreasing between one and two percent annually, while graduate school applications have been increasing by four to five percent annually
Researchers have identified one important reason for the discrepancy between applications and enrollment: money. Scholarships and grants for graduate education have decreased significantly since 2008, while costs for graduate school degrees continue to escalate. Students are looking at the loans they have hanging over their heads from their undergraduate careers and thinking twice about graduate school.
Good News Travels Fast
Anticipating the good news that better times may be just around the corner, the Federal Reserve Bank earlier this week announced that it was injecting only $42 billion into the economy, $10 billion less than the previous month’s remedial treatment. The 10-year Treasury yield rose to 2.678 percent. Mortgage rates are pegged to the 10 year Treasury. As the yield on the 10 Year Treasury increases, mortgage rates increase to compete with the safer Treasuries. When the 10-year Treasury reaches a 3 percent yield, higher mortgage rates will throw a wet blanket over the housing recovery, but that is the direction the Fed appears to be heading, as it continues to reduce its cash injections. In the meantime, until the Fed puts the clamps back on the money supply, things do seem to be looking up.
Housing Permits Up 11 Percent
The residential housing construction market segment put in mixed results in March. No one is breaking out the champagne yet, but some economists are heading toward their liquor stores.
Approximately 990,000 new building permits were issued for privately owned housing units in March of 2014, down 2.5 percent from the 1,014 million permits issued in February. Of these, 592,000 or 59.7 percent were single family home building permits. An increasing ratio of single family permits to multi-unit permits is a sign of economic growth. The March figure for all new permits was up by more than 11 percent over the March 2013 figure of 890,000 permits, another encouraging sign.
Housing Starts Down 6 Percent
There were 946,000 actual housing starts in March, 2.8 percent better than February’s estimated 920,000 units but almost 6 percent less than March 2013, when 1.005 million starts were reported. There were 635,000 single family starts in March, 67.1 percent of all housing starts. Comparing permits to starts suggests somewhat less optimism among builders, who have pulled 6.7 percent fewer permits than they have in houses under construction.
Six months of job growth and housing growth together would signal the end of the recovery process, but the end of the recovery phase could also mean significant interest rate increases as the Fed winds up its qualitative easing program, letting the economy stand on its own two feet to see if it can keep its balance, or if it is going to need a walking stick to replace the crutches the Fed has been providing since 2008.
Whichever Way You Slice It
The April employment spurt, following a strong March Jobs report, is a good thing. Construction gains are a good thing, too, but American workers are not out of the woods yet and sometimes a growth spurt turns to be a great coming attraction for what turns out to be a terrible movie. Only time will tell, and time’s not telling yet.
By Alan M. Milner
Look for me on Twitter:@alanmilner