Today’s employment report revealed labor market gains that were more moderate than strong. The unemployment rate fell to 3.9%, an 18-year low, but this was mostly due to a tick down in the labor force. Employment gains, at 164,000, came in slightly below expectations for 190,000, though the prior two months’ gains were revised up by a cumulative 30,000. Wages grew 2.6% for the third month in a row; this continued lack of acceleration is one indicator that some labor market slack remains.
That said, the labor market is still clearly closing in on full employment with sizable, steady month gains. To boost the signal-to-noise ratio in these noisy monthly data, our smoother shows average monthly gains over 3, 6, and 12-month periods. These are all clocking in at around 200,000, which should be enough to continue pushing down the jobless rate.
The wage story told by these monthly reports continues to underwhelm. Despite persistently low unemployment, as the figure below reveals, wage growth on a yearly basis, before inflation, has been stuck in the mid-2’s for about two years. In a truly tight labor market, more wage pressure would be visible in this series, the inverse of the sharp decline in wage growth during and after the downturn.
To be clear, recessions typically whack nominal wage growth more sharply than recoveries boost them: nominal wages take the elevator down and the stairs up. But the gradual gains in 2015-16, from about 2% to 2.5% ceased around mid-2016, even as the job market clearly tightened further. Other dynamics are in play here, including people entering and leaving the job market (lower-wage workers coming into the job market can reduce the pace of wage gains); some other series show better wage outcomes than this one. But even given these considerations, this indicator should definitely be taken as a signal that some slack still exists in the job market.
It is also worth noting that consumer inflation has been running just slightly below this level (2.4%, year-over-year, in March), meaning paychecks are running just slightly ahead of price growth.
Those of us who’ve argued that slack still remains in the US job market tend to focus on the employment rates–share of the population with jobs–of prime-age (PA: 25-54) persons. In my monthly reports, I’ve emphasized that this group has pretty consistently been clawing back their losses since the last recession. Though this rate was unchanged in April, holding at 79.2%, since the downturn, it has climbed significantly. The PA employment rate fell 5.5 percentage points in and after the recession, but as the figure below shows, they’ve clawed back 4.4 percentage points of that loss, or 80%. For men, the comparable percentage point loss was 7.6; they’ve made back 5.9 points, or 78%; prime-age women lost 4.1 points and have made back 3.5 points, or 85%.
This implies some potential extra labor supply to be pulled into the job market. There is, however, the caveat that some of these workers face significant barriers to joining even a pretty hot job market, including health/skill deficits, criminal records, and long periods of joblessness. Others dwell in areas where job availability is still too low. So, along with continued tightening of the job market, other interventions, including training, apprenticeships, and direct job creation, will be needed to help them overcome these barriers.
Turning briefly to sectors, manufacturing employment posted solid gains of 24,000 in April, mostly in the higher paying durable goods part of the industry. According to BLS, “Over the past 12 months, manufacturing has added 245,000 jobs, with about three-fourths of the growth in durable goods industries.” Since these solid gains in an important industry partially relate to exports, they underscore the importance of avoiding unnecessary disruptions in our trading regime.
Other services, including office work and health care, continue to post moderate to solid gains, but retail jobs continue to struggle due to competition with online sellers. Retail stores added just 2,000 jobs last month and only 72,000 over the past year, a gain of just 0.4%. In comparable periods of previous expansions, retail jobs typically grew 1-2 percent.
Finally, the Federal Reserve is, of course, closely scrutinizing these data for guidance as to the pace of their rate hike, or “normalization,” campaign. As the figure below shows, unemployment has long been below their target/”natural” rate. The figure also plots their preferred inflation measure which has tilted up of late and is just about at their 2% target. However, this target is a symmetrical one and the fact that they’ve been below for almost every month in the graph, along with the stable wage growth results discussed above, argues for patience.
The job market remains solid, and while this report was more moderate than strong, this is to be expected as we close in on full employment. We’re testing, to some degree, the extent of slack left out there in the US job market. However, as long as price growth remains around 2% and wage growth is not accelerating, our best play by far, on behalf of working Americans, is to let this experiment continue.