After the Jobs Report: How to Get to 5.5% Unemployment

NEW YORK (TheStreet) -- Finally, a real recovery to believe in.

It's not just that the economy created 288,000 net new jobs in June, reducing the unemployment rate to 6.1% -- its lowest since Lehman Bros. blew up in September 2008.  

The best thing about today's report isn't the top-line number -- it's the distribution of new jobs that helped the nation get there.

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In a piece last year, I said job gains would get to 250,000 a month when hiring picked up in construction (thanks to an improving housing market) and in state and local governments, as manufacturing added about 10,000 and employment in services business responded to signs that the last weak spots in the economy were finally strengthening.

And that's what happened in June. Construction companies hired just 6,000 workers according to the Labor Department, but ADP's survey of private-sector employers said Wednesday that they hired 36,000. Average the two and construction hiring is in very solid territory.

Governments, which were still more than 700,000 people short of their pre-recession peak in earl 2014, hired 22,000 people. Manufacturing added 16,000.

Better still, the underlying data suggest that construction and manufacturing employment will be steadily gaining later this year. A 19% gain in May new-home sales, coupled with a 6.1% rise in contracts to sell existing homes, shows confidence in housing rebounding.

And purchasing managers survey data and individual respondents' answers show confidence among manufacturers that will lead to more hiring, says Brad Holcomb, chairman of the manufacturing purchasing managers' survey for the Institute of Supply Management.

The next step is to push unemployment down to 5.5% -- around the top of the narrow range economists consider full employment. It's coming sooner than you think -- sooner than the Federal Reserve's public forecasts indicate, for sure.

But to make the improvement last and make it possible for businesses to give workers better raises without sparking inflation, companies will have to change their ways, and investors will have to bring the pressure to make them do it.

So, it's on to full employment now. What will it take?

First, it will take a little bit of time and a little bit of math.

There are about 156 million U.S. workers, and 9.5 million of them are unemployed. Moody's Analytics chief economist Mark Zandi says the economy's growth trend right now is 225,000 jobs a month -- a little more or less in given months, depending on short-term events.

So by the September jobs report -- the last one before the election -- that means another 675,000 jobs. Even with a slight increase in the number of workers, that gets you to a rate that rounds up to 5.7%.

But if workforce participation stays low, which is a good bet, or if the summer brings a fatter part of the cycle that produces more reports like today's, 5.5% is possible before the election.

In any event, it's nearly certain by the end of the year -- even if the Fed's most recent year end forecast is for 6% to 6.1%. It's very, very simple math.

The other thing it will take is harder: Businesses have to invest more.

Just as construction and government employment were the missing pieces last year, now the big gap is the persistent unwillingness of corporate America to invest more. From 2011 to 2013, business lobbies and CEOs such as Boeing's (BA) James McNerney and Honeywell's (HON) Dave Cote convinced Congress that deficit reduction was the key to boosting business confidence and job creation. After they got nearly everything they wanted (save a cut in the corporate tax rate), corporations in general boosted investment even less.

In 2011, Corporate America boosted equipment investment nearly 12%. After the budget dealing, that fell to 3.1% growth by last year. And, possibly because of the weather, it actually shrank 2.8% in the first quarter of this year.

That investment is what's needed for more manufacturing jobs, better productivity growth and the kind of expansion that generates wage gains without much inflation. 

So hop to it, boys. Full employment depends on you now.


At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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