Job gains and GDP: Why the paradox?

Raymond Keating
Raymond Keating

The July jobs report from the Bureau of Labor Statistics was good news in terms of the broad numbers, but feeds into a striking recent paradox in our economy.

First, in terms of the payroll survey, employment increased 255,000 in July. That’s two strong months of job gains in a row, after an eight-month dramatic decline in monthly gains. In addition, June and July gains were largely about private-sector payrolls.

Second, the news from the household survey was excellent for July as well coming after poor reports in April and May and mixed numbers in June. In July, there was a big bounce back, including a gain in the labor force of 407,000, inching the labor force participation rate from 62.6 in May to 62.8 percent in July. That’s still far too low — the pre-recession rate came in at 66 percent — but a reversal from the declines in April and May. Employment also jumped by 420,000 in July, pushing the employment-population ratio up a bit, from 59.6 percent in June to 59.7 percent. Again, this is still too low compared to better than 63 percent pre-recession, but a welcome move up from the last few months.

Third, the only clear negative in this report was a continuing decline in July in the self-employed. That is, unincorporated self-employed declined for the fourth straight month. The July level also was down from a year earlier. Keep in mind that July’s 9.426 million unincorporated self-employed was off markedly from pre-recession levels — such as 10.86 million in December 2006.

For good measure, incorporated self-employed experienced no real growth over the past year, that is, 5.468 million in July 2016 versus 5.453 million in July 2015. In addition, the July 2016 level compared poorly to the July 2008 level of 5.682 million and was at about the same level as the 5.453 million in 2006.

Out these two measures together, and over the past decade, we’ve experienced a decline in the number of self-employed.

Fourth, and finally, a generally solid job report in July diverges dramatically from the latest report on gross domestic product.

This is a paradox to many. After all, how can we have a fairly strong consumer and solid job gains coincide with poor overall economic growth, declining business investment and falling entrepreneurship? The simple answer is that these trends will have to converge at some point. The question is, of course: Will GDP ramp up or recent job gains fall back? Given that investment and entrepreneurship are foundational to growth, the more likely scenario is that a month or two of solid job gains will be pared back barring some dramatic and unexpected shifts in, for example, tax and regulatory policies in a pro-growth direction.