Payrolls rose by 148,000 last month and the unemployment rate held steady at 4.1 percent. While the headline payroll number was below consensus, this is another solid report. Persistently strong job markets are most beneficial to the least advantaged—privileged types do well even in weaker markets—and the December unemployment rate for African-Americans fell to 6.8%, its lowest on record going back to the 1970s. The black-white gap (black minus white unemployment), at 3.1 percentage points, is also the lowest on record.
Especially given weather issues in recent months, it’s essential to look at my monthly smoother, which shows payrolls adding a very solid 204,000, on average, over the past three months (2017q4), a slight acceleration over the longer-term trend. So, while the 148,000 payroll number was below expectations, it should not be over-interpreted. The job market remains strong.
Moreover, there are no signs of overheating. To the contrary, wage growth is uniquely stable, as the next two figures reveal. Average hourly earnings were up 2.5%, year-over-year, for all private-sector workers, and just 2.3% for blue-collar (manufacturing) and non-managerial workers (services). Though some other wage series show more responsiveness to the tightening job market, this remains a missing piece in the current recovery. By this point, I’d have expected more of an acceleration in these two wage series.
With today’s data, we have a first look at the 2017 labor market. Employers added a net of 2.1 million jobs in 2017, an average of 171,000 jobs per month and an annual growth rate of 1.4% (these numbers will be slightly revised in coming months). That’s a bit slower job growth than prior years, as shown in the table below, but this is a typical pattern as the job market closes in on full employment (h/t to the great Lexin Cai for making this table!).
Unemployment ended the year at a cyclical low of 4.1 percent, but as I note below, I suspect it will continue to decline even more this year, perhaps hitting levels we haven’t seen since the 1960s (maybe 3.5% by the end of the year).
Wage growth, as discussed above, grew less quickly last year, barely beating inflation (the inflation rate is from Nov/Nov, as Dec data are not yet available).
The two participation columns in the table are important in terms of labor market dynamics. The labor force participation rate is clearly stuck below 63 percent, which suggests little responsiveness of labor supply to the stronger job market. But check out the next column: the employment rate for prime-age (25-54) workers. This series, which leaves out potential retirees and is thus a more relevant gauge of demand responsiveness, is growing, albeit ploddingly, and is up 4 percentage points since 2010.
It’s still—9 years into the expansion—about a percentage point below its pre-recessionary peak, so I’m not popping champagne corks. But that cyclical response among prime-age workers, who’ve clawed back about 80% of their employment-rate loss, suggests there’s at least some room-to-run in the job market, as do subdued wage and price changes.
If I’m right (and others have made the same prediction), and the jobless rate falls further this year, a key question is whether the Federal Reserve will accommodate or pushback on falling unemployment. Of course, a major factor in their thinking will be the extent to which the tighter market pushes up wages and prices.
I’m speculating, of course, and perhaps my hopes are clouding my judgement, but barring an uexpectedly sharp acceleration in wages/prices, I think the Powell Fed will accommodate the uniquely tight job market. To be clear, I’m not suggesting they’ll pause their “normalization” rate-hike campaign, but I think they’ll tap rather than slam the brakes.
Part of my hopes are based on the racial gains discussed above. This last figure shows the black and white unemployment rates. As is the case in long expansions, the black jobless rate has fallen faster than the white rate, and the gap (black rate minus white rate) is at an all time low.
I cannot overemphasize the importance of this result and how essential it is for the recovery to proceed apace so we can tap this long-awaited elasticity. Especially given the lack of price-pressures, the punch bowl is figuratively screaming at the Fed: “keep your hands off me!”