Jobs report: Another strong month as payrolls settle into solid trend, but wage growth still underwhelms

December 8th, 2017 at 9:31 am

The US labor market continues to add jobs at a strong clip, as robust consumer demand is generating a virtuous cycle of job growth, increased weekly hours, wage growth (though see ongoing caveats below), and hiring. Payrolls were up by 228,000 last month, above expectations for about 190,000. The unemployment rate held steady at 4.1 percent, a 17-year low.

Our official monthly jobs smoother filters out some of the noise in the payroll data by taking monthly averages over the last 3, 6, and 12 months. The fact that the bars are all about the same height reveals the underlying trend in job growth to be around 170,000 per month, a healthy pace for this stage of the recovery. As labor markets close in on full employment, job growth slows a bit as workers become more scarce.

However, given the movement of other key variables, namely, wages and prices, the full-employment, full-resource-utilization case cannot yet be made, as I show below.

Once again, hourly wage growth is a sore point. The two figures below show yearly wage growth for all private-sector workers and for the 80% of the workforce that’s blue-collar in goods production or non-managerial in services. In both cases, the 6-mos moving average reveal a flattening trend. Basically, in 2015-16, the tightening job market drove wage growth up from 2 to 2.5 percent, around where it has been stuck since. In fact, that’s precisely last month’s yearly growth rate for all private workers (2.5%). Given the consumer inflation has been running at around 2%, that’s but a small hourly wage gain in real terms, and certainly less than I’d expect given a 17-year low in the jobless rate.

 

That said, other series show stronger wage growth, as Dean Baker and I point out here, especially for middle-wage and minority workers, so the jury’s not in on the mystery of the missing wage growth. All told, in a series that mashes together 5 different wage series (which I’ll post later) we see a mild acceleration, but again, less than would be expected.

Also, hours worked per week ticked up last month and weekly earnings were up 3.1%, the strongest weekly growth rate since early 2011.

One theory is that the job market is pulling less skilled and experienced workers in from the sidelines, and this is holding down wage growth. But the Atlanta Fed tracker, which tries to control for this, doesn’t show much acceleration either.

All of this creates a challenging dynamic for the Federal Reserve. The next figure shows how the current unemployment rate of 4.1% is below the rate the Fed’s “natural rate,” i.e., the lowest jobless rate consistent with stable prices. But neither prices (core PCE, the Fed’s preferred gauge), which recently went through a bout of DEcelleration, nor wages, are responding much at all to low unemployment.

Are there, then, measures of labor demand that do not show a fully tight labor market? In fact, labor economists consider the employment-to-population ratio of prime-age (25-54) workers is a quick proxy for this question. This rate fell from about 80% before the last recession to 75% at its trough. It’s now at 79% so it has clawed back about three-quarters of its losses. In other words, it’s possible that the labor force still has some room-to-run and that labor demand, as strong as it is, still hasn’t exhausted labor supply.

Turning to sectors, manufacturing had a strong month, picking up 31,000 factory jobs last month. So far this year, manufacturing employment is up an average of 16,000 per month, compared to about zero last year. That’s partly due to stronger growth abroad pulling in more of our exports, but the dollar has gained strength of late, and that could dent these gains going forward, as the stronger dollar makes our exports more expensive relative to imports.

Retail trade stores added about 19,000, which is the biggest gain for the sector in a year. The strong job market could help the sector as the holiday season gets underway, but brick and mortar stores are of course in heated competition with online sellers. (Note: these data are adjusted for seasonal hiring effects, so any gains reflect jobs added above the usual seasonal pattern.)

Surely, some politician will say something foolish about how the solid November report reflects the tax cut that’s working its way through the Congress. If I could, I’d issue fines for such statements ($1.5 trillion sounds about right). As the smoother graph shows, we’re right on a trend that’s been ongoing for years now. As noted, there’s real momentum in the economy, with job gains, if not much in real hourly wage gains, boosting household incomes.

The challenge for policy makers, especially at the Fed, is to not get spooked by the strong quantity numbers (jobs) when the “price” measures–wages and inflation–are not flashing red at all.

What’s up with productivity growth and what does it mean?

December 6th, 2017 at 11:56 am

I’ll be brief, because first and foremost, the recent uptick in productivity growth that I’m about to show you may be statistical noise. These are jumpy data. But in case this sticks, I did want to lay down a marker and tout some potential implications.

This morning’s revised productivity report has output per hour up a rousing 3 percent in Q3. That’s an annualized, quarterly rate, and OTE’ers know I like to filter out some of the noise by looking at year-over-year changes.

So, the table below shows the recent acceleration in year-over-year changes in the key variables.

Since productivity growth equals output minus hours growth, we can decompose the increase. It’s all about faster output growth; hours of work have slowed a touch.

Now, there could be a bit of the hurricane season in there, as that hurts employment but boosts (gross) output. Also, as we close in on full employment, employment and hours growth will naturally slow.

What’s a bit disconcerting here–with even bigger caveats re data noise in this series; I’m pretty skeptical of this wage result–are the unit labor costs, which measure compensation growth relative to productivity growth. We typically expect pay to rise along with productivity growth, at least at the average (if not so much the median), especially as the job market tightens. And, as Dean Baker and I point out here, you see real wage pressures in some series. But compensation slows of late in this series. And slower compensation amidst faster productivity growth drives down unit labor costs.

That dynamic–productivity rising faster than comp–also drives down labor’s share of national income, as the next figure shows (the BLS labor share data is more pessimistic than other series; part of the decline is due to imputations of self-employed earnings, but all measures show a similar trend).

Source: BLS

Towards the end of the figure, if you squint you can maybe see the beginning of a trend reversal around 2015, but the series has since turned down again. It’s an unsettling picture of where most income growth has gone in recent decades.

At any rate, if this productivity acceleration sticks, and that’s a big “IF,” here are some implications:

–The Fed has even less reason to raise rates, as faster productivity growth can pay for non-inflationary wage gains.

–Score one for the full-employment-multiplier theory a number of us like to tout. As the job market tightens, firms must find new efficiencies to maintain profits margins as production costs rise (another reason the wage result above looks fishy to me).

–Get ready for a lot of ridiculous claims that the tax cut and MAGA are responsible for the acceleration.

The return of the musical interlude

December 5th, 2017 at 12:58 pm

Since the On the Economy blog is on hold for the moment, I need to revert back to the old music feature I used to post regularly here.

First, I was just walking down the street and it seemed like every other person had a big hello for me, which put me in mind of this great, old classic from Duke Ellington and Louis Armstrong.

But my main feature today is an amazing performance that I strongly suspect you’ve never heard. It’s the classical guitar master (and my old pal) Ben Verdery playing Jimi Hendrix’s Purple Haze (with bits of other Hendrix tunes slipped in; I thought I heard references to Little Wing, Voodoo Child) with, not a stack of Marshall amps, but just a little old guitar. To my ears, he totally captures the energy and innovation of this amazing music I first heard 50 years ago. And can we talk about that ending??

A quick note on CHIP, block grants, and the tax cut

December 5th, 2017 at 8:39 am

This piece from the WaPo makes an important point, which I’d like to embellish a bit.

A few months ago, Congressional authorization for the CHIP program expired, and they still haven’t reauthorized the funding, which is a block grant to states in support of this health coverage program for 9 million low-income kids and pregnant women.

On Friday, Utah posted a notice online saying it probably will run out of CHIP funding by the end of January. Earlier in the week, Colorado notified families that their coverage might end early next year. Arizona, California, Ohio, Minnesota and the District are also nearing the end of their funding, as is Oregon, whose Democratic governor, Kate Brown, has directed the state’s health authority to continue financing CHIP through April out of its reserves.

Unlike Medicare, Medicaid, SNAP, and other programs that automatically expand and contract with need, block granted programs depend on Congressional re-authorization. Therein lies one of the problems (I’ll get to another below) and the article raises an important concern:

…imagine this same situation, but applied to Medicaid, the program that covers far more Americans — around 70 million.

The reason Congress must reauthorize funding for CHIP is because it’s a block grant program, meaning that states are provided with a set amount of federal dollars instead of an ongoing funding stream (as with Medicaid).

Were Congress to convert Medicaid into block grants, as Republicans tried to do in multiple health-care bills this year, it’s feasible lawmakers might show the same delay in letting funding lapse, throwing states into uncertainty on an even larger scale.

In other words, what’s going on with CHIP is a potent warning against block granting other safety net programs, like Medicaid or SNAP (moreover, we’ve written that the CHIP block grant is set up to work better than the ones proposed for Medicaid). This is a very well known problem, btw, to those of us who followed the block-granting of TANF (cash payments to poor families). Its funding froze and its anti-poverty and counter-cyclical effectiveness have been hugely diminished.

Here’s a new problem in this space. If the Republican tax bill passes, as I suspect it will, and they significantly reduce the state-and-local tax deduction, those states that want to raise the revenues necessary to support block-granted programs will have a much harder time doing so, since their residents can no longer write off most or all of these tax payments against their federal liabilities.

In this regard, Republicans are up to a devious bait-and-switch. They want to convert safety net programs that current respond to need into fixed-funded block grants, while at the same time reducing states’ ability to support these programs.

Yet more on the terrible tax plan…

December 4th, 2017 at 4:15 pm

Similar pieces wherein I’m trying to work out some of the longer term implications of what’s happening with tax policy, the debt, and the forthcoming attack on spending programs that, you know, actually help some people.

Over at WaPo and TAP.

I’ve not forgotten that there’s much else going on. I’ve got forthcoming pieces on the attack on financial market regulation, which, unless you’re following this, goes deeper than you thought, and current economic conditions as a baseline against which to evaluate a bunch of silly claims that will soon be made about the impact of the tax plan on growth.