The monthly payroll report is arguably one of the most closely followed U.S. economic data releases, as it’s often viewed as a barometer of economic health by investors and policymakers.1 As a result, the report can materially impact the financial markets. I believe that after years of steady job gains, markets have become complacent about job gains that, in fact, outpace our trend rate of employment gains. The reality of the current low growth environment – as outlined in Investing in the New Normal – is that monthly payroll numbers may soon be significantly weaker than we have seen so far in this expansion.

Linking payrolls to trend employment growth
The concept of “trend employment growth” has received a lot of airtime recently, especially with Federal Reserve policymakers. Yet the link between trend employment growth and the market-moving monthly payroll report takes a little explaining.

Trend employment growth is the rate of employment growth (increases in payrolls) needed to keep the unemployment rate steady. Think of a 6-foot-4 college student with dreams of being a linebacker for his university’s football program. To get in football shape, our athlete might bulk up with increased exercise supported by a diet of 4,000 calories a day. Once he reaches his targeted weight, his coach may scale back his diet to 3,000 calories a day to maintain his weight.

The Fed targets “full employment,” an equilibrium rate of unemployment consistent with the economy neither overheating nor stalling into downturn. A dietician may call it maintenance, whereas an economist would call it a “steady state.” At present, the Fed estimates the equilibrium unemployment rate to be close to 4.7%–5.0%,2 roughly where we are now.3

Since 2010, the U.S. has averaged 185,000 new jobs per month.4 During that time, the unemployment rate has fallen from 10.0% right after the recession to its current rate of 4.7%.4 If our economy is close to an equilibrium employment rate, then policymakers, like our athlete’s coach, will be looking to switch to maintenance mode.

4% 5% 6% 7% 8% 9% 10% 11% October 2009 December 2016 Source: Bureau of Labor Statistics, as of January 6, 2017 UNEMPLOYMENT RATE CLOSE TO EQUILIBRIUM ESTIMATE

Finally, a further challenge for market expectations is the fact that trend employment growth has fallen. Going back to our linebacker, let’s assume he has now graduated from college, set aside his football helmet and taken a desk job. At an older age and with less activity, his maintenance diet would shift to about 2,200 calories a day. In many ways, this example translates closer to the truth of our country’s labor force. In the 1980s, when labor force growth was strong, the trend payroll number was estimated at 160,000.5 Now, as baby boomers are aging and retiring, our labor force growth has slowed sharply, which significantly reduces the equilibrium monthly payroll number.

Bridging expectations
Here’s where it gets interesting for investors. Given today’s labor force demographics, the maintenance level payroll gain is significantly lower than the current pace of payroll growth. The Federal Reserve Bank of San Francisco recently estimated a range for trend payroll growth and concluded that it was “about 75,000 jobs per month.”5 Yet if investors faced several months of payroll numbers near 75,000, they would likely view it as a significant downside surprise rather than a trend. 

Take September’s payroll report as an example: when the initial report showed the economy added 156,000 jobs, the October 7 headlines reflected disappointment. USA TODAY’s headline read: “Disappointing 156,000 jobs added in September,” and even The Wall Street Journal reported the gain was “Stubbornly Average.” The reality is that, in the new normal, 156,000 is not an average number, but is well above trend. Market psychology, however, has not wrapped its collective mind around how the new normal translates into monthly payroll reports.

200+ payroll growth is unsustainable Job growth (thousands) -300 -200 -100 0 100 200 300 400 500 600 October 2009 December 2016 Payrolls 5-year average Source: Bureau of Labor Statistics, as of January 6, 2017

Bridging expectations from a broad-based theory to the actual economic data will – in most likelihood – require a painful downward adjustment, particularly since markets have been lulled by data that is, in reality, above trend and quite robust. Low growth is a critical part of the new normal framework, and it is crucial to understand how that will translate into the challenges facing investors today.

1 “4 Key Indicators That Move the Markets,”
2 Federal Reserve Board economic projections of longer-run central tendency, September 21, 2016. 
3 The unemployment rate has been between 4.7%–5.0% for the 12 months starting in October 2015 (Bureau of Labor Statistics).
4 Bureau of Labor Statistics, data tools employment database, as of January 6, 2017.
5 FRBSF Economic Letter, October 24, 2016,

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