In the latest edition of a long series of solid job reports, payrolls posted a strong 235,000 job gain last month, as the unemployment rate ticked down slightly to 4.7 percent and wages accelerated a bit.
Federal Reserve officials, many of whom had already been talking about getting back to their “normalization” campaign–raising the benchmark interest rate they control back up to more normal levels–sooner than later, will find very little in today’s report to wave them off a rate hike at their next meeting later this month.
The jobs day smoother, which averages out monthly noise over 3-, 6-, and 12-month periods, shows payroll growth at around 200,000 jobs per month at each one of these averages. Given the size and growth of the labor force, this healthy pace of employment growth is strong enough to continue putting downward pressure on the jobless rate and upward pressure on wage growth.
Speaking of wages, the pace of growth of workers’ paychecks is sending a signal that the tightening job market is providing workers with a bit more bargaining clout. In tight labor markets, which have been the exception in the US job market in recent decades, employers typically must bid compensation up to get and keep the workers they need.
We’ve already seen some of this dynamic in recent job reports, as the figure below reveals. From about 2010 to 2015, average hourly wages grew at about 2 percent, year-over-year. But around mid-2015, as unemployment hit 5 percent, heading for rates with a ‘4’ handle, wage growth accelerated. It held at around 2.5 percent for a few months, but as the figure shows–note the smooth trend line–has accelerated further in recent months, increasing 2.8 percent in February.
The question for the Federal Reserve, however, is not just “are wages accelerating?” Their dual mandate is full employment at stable prices, not stable wages. Moreover, wage gains for middle- and low-wage workers have been long awaited in this recovery, so the decision to tap the brakes on growth by raising the interest rate–which could push back on this favorable, accelerating trend–cannot be taken lightly. The questions much be a) how much slack is left in the job market? and b) most importantly, is wage growth fueling faster price growth?
Re ‘a’, (are we at full employment?): Not quite. The underemployment rate, a broader measure of slack, fell from 9.4 percent in January to 9.2 percent last month, but it is still elevated due to 5.7 million involuntary part-timers, though that number is down 300,000 from a year ago. Still, at full employment, I’d like to see an underemployment rate of around 8.5 percent.
The other indicator that still has some room to run is the employment rate of prime-age workers. At 78.3 percent, it’s still below its pre-recession peak of 80.3 percent (see figure). However, at its low point, this rate was at 74.8 percent, meaning these workers have clawed back 3.5 percentage points, or about 2/3’s of the decline. That decline was stronger for men–their employment rate fell 7.6 points from its peak, but they’ve made back about 5 points, also about 2/3’s. Women were down 4.1 points and have made back about 3 points.
These gains seriously challenge a common narrative that goes something like this: some number of prime-age workers are “ungettable,” meaning they can’t be pulled back into the labor market because of “supply-side” problems–they’re disabled, they’re addicted to drugs, they’re too busy playing video games. I do not at all dismiss these problems and that supply-side number isn’t zero, for sure. But as labor demand has strengthened, the progress we’ve seen in prime-age employment is telling us something important about these men and women that we shouldn’t ignore. Most of them will work if they can find gainful employment.
On wages and prices, the figure below shows:
–the unemployment rate is right about at what the Fed thinks is full employment;
–as shown above, wage growth is picking up a bit;
–the Fed’s inflation gauge, core PCE, is growing a touch faster but remains below the Fed’s target inflation rate of 2 percent, a miss that’s been persistent in recent years.
Summarizing, we’re edging closer to full employment but the risks remain at least somewhat asymmetric for the Fed: the risk of slowing demand too soon is probably still a bit greater than the risk of un-anchored price inflation. But I admit it’s a closer call than in past months and can see their rationale for a quarter-point hike.
A few other notable indicators:
–The 58,000 jobs gained in construction were partly due to unseasonably warm weather in February. The non-seasonally-adjusted gain of 61,000 was the largest on record since 1968.
–The 28,000 gain in manufacturing, its best showing since January 2016, was also very welcomed, especially given the increased strength of the dollar, which makes our manufacturing exports less price-competitive in international markets.
All told, the US job market continues to post solid gains, and the tighter job market is delivering wage gains to working families, and not just at the top, but across the wage scale. The data may well push the Fed to raise rates a bit, but if so, their best move would be one-and-done, at least for awhile, while they make sure their actions do not interrupt some of these favorable, ongoing trends.