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The U.S. Economic Recovery Now Depends On Consumers

The effects of the global economic slowdown are at last reaching American shores. With the Federal Reserve and Congress unlikely to provide much protection, U.S. consumers may be all that’s keeping the recovery on track.

U.S. employers added a disappointing 142,000 jobs in September, and also hired fewer new workers in July and August than previously reported, the Bureau of Labor Statistics said Friday. The unemployment rate held steady at 5.1 percent, but only because tens of thousands of job-seekers stopped looking for work.

The monthly report was the clearest sign yet that the pace of hiring has slowed since earlier this year. Employers were adding jobs at a pace of about 3 million per year in the spring; that has now fallen to 2.8 million.

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It’s important to keep the slowdown in perspective. September’s 142,000-job gain was weaker than economists expected and below recent trends, but it still represents solid growth. Over the longer term, the U.S. has added jobs every month for the past five years; the last negative month was in September 2010, when the government was laying off workers hired to conduct the 2010 census. In the private sector alone, the streak has lasted even longer. Employers have added more than 12 million jobs in the past five years.

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Still, Friday’s report was disconcerting because economies around the globe are struggling and there are mounting signs that the U.S. may be following suit. China, the world’s most powerful economic engine in recent years, has seen its growth rate slow dramatically in recent months, as have other developing countries, while Europe and Japan remain mired in prolonged slumps. The U.S. had for a time seemed to buck this trend, but that may no longer be true: Financial markets just completed their worst quarter since 2011, and the U.S. manufacturing sector has slowed significantly and may be contracting. The Federal Reserve last month delayed its first interest-rate increase in nine years largely because of fears that the global slowdown could infect the U.S.

Friday’s report will only add to those fears. Manufacturers cut 9,000 jobs and also reduced workers’ hours and overtime. The oil and gas sector continued to slash jobs amid tumbling energy prices.

The bright spot in the economy remains consumer spending. Retailers added nearly 24,000 jobs in September, and the leisure and hospitality sector added another 35,000; together, the two industries accounted for close to half of all private-sector job growth for the month. Other indicators also show consumer spending remaining strong.

The key question now is how long consumers can keep powering the economy. Wage growth remains weak: Hourly earnings rose 2.2 percent in September from a year earlier, faster than inflation but weaker than most economists would like to see at this stage of the recovery. The decline in relatively well-paying manufacturing jobs won’t help change that trend. Low oil prices help workers keep more of the money they earn but, because of the drilling slowdown, also deprive the economy of a recent source of good jobs.

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This much is clear: Consumers aren’t likely to get much help supporting the economy. The U.S. is less dependent on exports than many other major economies, but many of its biggest companies depend heavily on overseas sales. Friday’s report could make the Federal Reserve less likely to raise interest rates before the end of the year, but barring more dramatic signs of weakness, the Fed is unlikely to step up its stimulus efforts. Congress, meanwhile, is unlikely to act to boost the economy and might even shut down the government, which would likely hurt it.

Here are a few more takeaways from Friday’s report:

The shrinking labor force: Just 62.4 percent of American adults (ages 16 and up) were either working or actively looking for work in September. That’s the lowest so-called participation rate since 1977. Much of the recent decline has been driven by demographics; millions of baby boomers are retiring, while many members of the millennial generation are still in school and haven’t yet entered the workforce. But the participation rate is declining even for “prime-age” workers, those ages 25 to 54, suggesting that demographics alone can’t be the full story.

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The continued decline of the labor force has defied the expectation of many economists, who thought the participation rate would at least stabilize as the economy improved. Millions of Americans gave up looking for work during the recession, and the recovery hasn’t yet been strong enough to get them back.

Indeed, the number of Americans reporting that they had jobs fell by more than 200,000 in September. That number, which is based on a separate survey from the more widely cited payroll figure, is volatile, and the decline could easily reverse next month. But even over the longer term, the rate of employment among working-age Americans has been stubbornly flat all year.

Less broad-based growth: Not only is total job growth slowing, fewer industries are growing at all. The Bureau of Labor Statistics uses a measure called the “diffusion index” to track how broad-based job growth is; a reading of 100 would mean that every industry is growing, while a reading of 50 indicates an equal split between growing and shrinking sectors. The index has been falling steadily since last fall and now stands at 52.9, the lowest it has been since early 2010. In the manufacturing industry, most sectors are now cutting jobs.

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The decline in the diffusion index is significant because it means job growth has become increasingly dependent on a handful of sectors. That makes the recovery more vulnerable; a negative shock to one of those key sectors would be more likely to tip the economy into a recession.

It’s still hard for the unemployed: The unemployment rate, at 5.1 percent, is back to a level most economists consider healthy. But that likely overstates the true health of the job market, at least for many workers. More than 2 million people have been out of work for more than six months, well above prerecession levels. One in four unemployed workers found a job last month, but roughly the same number stopped looking for work altogether.

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Friday’s report showed a dramatic drop in the number of underemployed, those working part time because full-time work wasn’t available. There were 6 million such involuntary part-timers in September, down from nearly 6.5 million the month before. The size of the drop is suspicious — it might well have been a statistical fluke — but over the longer run, there has been a clear trend away from involuntary part-time work.

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CORRECTION (Oct. 2, 3:21 p.m.): An earlier version of the hourly earnings chart in this article incorrectly labeled the y-axis. The change is measured in percentage points, not millions.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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