Payrolls rose 200,000 last month, the unemployment rate held steady at 4.1% and wage growth popped up to 2.9%, it’s the fastest year-over-year growth rate since mid-2009. In other words, here’s yet another strong jobs report.
Our jobs-day smoother averages out some of the monthly noise in the payroll data by taking averages over 3, 6, and 12-month periods. As shown below, payrolls are up a strong 192,000, on average, over the past three months, a very nice job-growth pace at this point in the expansion. In fact, the slight acceleration in the figure suggests there may be more room-to-run in this economy than we previously thought, which—co-inky-dink!—happens to be the punchline of a new paper from our Full Employment Project.
As CNBC anchor Becky Quick pointed out this morning during their segment in which I joined, we may be entering that phase of the cycle where good news on Main St. is bad news on Wall St. That is, accelerating wage growth may lead the Federal Reserve to tighten faster, slowing overall growth more than currently expected. That certainly was the market reaction this morning, as the 10-year bond yield spiked on the report, suggesting concerns about future inflation and a more aggressive rate-hike schedule at the Fed.
However, as I note below, there are excellent reasons to embrace and welcome, not fear, faster wage growth.
First, some other notable aspects of the report:
–The African-American unemployment rate jumped up from its record low of 6.8% to 7.7%, another reminder of the volatility in these monthly numbers.
–The employment rate of prime-age workers (25-54) is an alternative metric of the strength of labor demand. Its peak was 80.3% in January 2007, and it eventually fell to a trough of 74.8%. Last month, it was 79%, meaning it has recovered 4.2 out of 5.5 percentage points, or about three-quarters of its lost ground. Whether this labor-demand proxy can continue to make back its losses (and more) is a key and hotly debated question. The figure below suggests a strong, ongoing response to the expansion, underscoring the more-room-to-run point. On the other hand, the series has been stuck at around 79% for the past five months, so it could be at its ceiling.
–Job growth was solid across most industries with one notable exception being state government, down 11,000 last month and 39,000 over the past year. This may reflect budget squeezes still facing some state governments.
–There were some weak spots in the report. Wage growth for the lower-paid 80% of the workforce that have production or non-managerial jobs was up only 2.4%, implying that faster wage growth last month mostly benefited higher-paid workers.
–Also, weekly hours pulled back a bit, leading to a 0.5% decline in total weekly hours in the private sector, an early measure of macroeconomic strength in the quarter.
Turning to why faster wage growth is good news, consider these points.
–People who depend on their paychecks rather than their stock portfolios, which is, of course, most working-age people, need a chance to make up lost ground. One place to see this is in the national share of income going to compensation, which took a big hit in the last recession and has yet to recover.
–Don’t assume wage growth is inflationary. Productivity plus the Fed’s target inflation rate equals about 1%+2% right now, meaning 3% nominal wage growth is consistent with stable prices. But re-balancing the labor share of income—from profits to paychecks—is also non-inflationary.
–Another thing you shouldn’t assume is that wage growth will automatically map onto price growth. That correlation has been very low in this economy.
–One month does not a new trend make! Check on the figures below, which show the trend in annual hourly wage growth for all private sector workers and for the lower-paid group noted above. The 6-month moving average is the right way to look at this, and it still looks pretty flat.
That said, it’s true that some other wage series show a bit more acceleration, which is, of course, exactly what you’d expect at this point in the cycle! So, fear not wage growth, my friends, but welcome it with open arms…and patience at the Fed.