Payrolls rose 156,000 last month and the unemployment rate ticked up slightly to 4.7, as the US job market continues to post solid and steady gains. Over 2016, average hourly wage growth is up 2.9 percent, the fastest yearly gain thus far in the recovery that began in 2009. Coupled with low inflation, this means the job market is delivering real gains to paychecks.
JBs monthly smoother (average monthly gains over 3, 6, and 12-month periods) shows that the pace of job growth has slowed over the year, in part due to weaker GDP growth, but also as is characteristic of maturing recoveries. The Federal Reserve’s rate hikes, albeit small, may also be in the mix as they too are intended to tap the growth brakes.
The 2.9 percent increase in average hourly pay over 2016 is the fastest pace of wage growth since mid-2009, when the current expansion got underway. (Do not make a big deal out of the big monthly bump of 0.4 percent–that’s a bounce back from last month’s nominal wage decline.) While this number may spook some inflation hawks, it should not:
–nominal wage growth of 3-3.5 percent is considered non-inflationary by the Fed;
–after years of stagnation, wage earners have a lot to make up, and part of that should come from the non-inflationary source of shifting some national income from the profit to the wage side;
–there’s little evidence of wage growth bleeding into price growth in recent years; as wage growth has accelerated, prices have not;
–for 80 percent of the private workforce who are blue collar and non-managerial workers, pay is up 2.5 percent over the past year, so the gains may not fully be reaching all corners of the job market.
As noted, 2016 ended with the unemployment rate at a low 4.7 percent. While that measure is about what the Federal Reserve considers full employment (and thus a rationale for their December rate hike), other indicators, while also improved, are not there yet. For example, underemployment, a broader measure of labor market slack that includes 5.6 million part-timers who’d want but can’t find full-time work, remains somewhat elevated at 9.2 percent. Note that this is down from almost 10 percent over the year, and the lowest it’s been yet over the recovery.
The labor force participation rate ticked up slightly to 62.7 percent, the same level as a year ago and well below its pre-recession peak. Below, I discuss the recent history of this important benchmark. Also, the employment rate for prime-age workers (25-54) stayed constant at 78.2 percent last month. While this proxy for labor market demand for a core group of workers (who are generally non-retirees) is up almost 4 percentage points from its trough, it remains about 2 points below its pre-recession peak.
A final indicator that has significant room to improve is manufacturing employment. While factories added a welcome 17,000 jobs last month, jobs in the sector are down 45,000 in 2016 and were up a scant 26,000 last year, compared to being up over 200,000 in 2014. Part of that decline is due to a strengthening dollar making our manufactured exports less competitive, along with slower growth abroad. Given the salience of manufacturing in not just the political debate, but in the economic conditions and opportunities of many American communities, along with its important role in contributing to productivity growth, this is an area of weakness that demands serious policy focus.
With December’s data, we can make a preliminary comparison over full calendar years (forthcoming revisions will alter these results, though typically not by a great deal). Over the course of 2016 (Dec 2015-last month), payrolls added 2.2 million jobs, an average of 180,000 jobs per month and a 1.5 percent growth rate.
Though still a robust pace of job growth, that’s a deceleration of job growth compared to the prior two years, when payrolls were up about 240,000 per month, on average. As noted, this slowdown is a function of slower real GDP growth in 2016 (and thus less pressing demand for labor) and a characteristic of job markets that are closing in on full employment.
As the figure below shows, tracking this Dec/Dec metric all the way back to 1940, the Great Recession (see circled part of figure) absolutely crushed the labor market, posting historic losses in both absolute (left axis) and percentage terms. As 2017 gets underway, annual payroll gains are back to their historical levels, with percentage gains of around 2 percent, a pace of job growth that is slightly higher than that of the 2000s expansion.
The table below compares a few other labor market indicators over the last two cyclical peaks (2000, 2007), the bottom of the Great Recession (2009), and, using today’s data, 2016 (I use Q4 averages to smooth out some monthly noise). The unemployment rate is in the same range as in the prior peak years, and much improved, of course, from the depths of the recession. In 2009, the US job market shed a nightmarish 423,000 jobs per month, over 5 million for the year, sending the unemployment rate to almost 10 percent and the underemployment rate to about 17 percent.
The very significant tightening up of the job market since then, in tandem with very low inflation (which has been, in fact, the major source of real wage growth in recent years), has recently led to faster nominal wage growth and higher real wages.
The labor force participation rate remains historically low, about three percentage points below its level at the end of 2007. But note that it fell in the 2000s cycle as well (though not as fast). Part of the decline over these years has been due to weaker job and wage growth failing to pull workers into the job market, while part—most, according to most analyses—relates to aging demographic trends.
If the partisan political dust ever clears, President Obama will be seen as having presided over one of the sharpest labor market recoveries in modern history, a dramatic reversal, as seen in the circled part of the figure above. The actions of his administration, along with the Federal Reserve, helped to hasten a recovery that, once it took hold in the job market, has delivered consistent employment growth since 2010. Wage growth, as noted, was a laggard, and the low LFPR and high underemployment rate suggests there’s still some room to run in the labor market before we’ve achieved full employment.
But the job market that president-elect Donald Trump is inheriting is strong—the “trend is his friend.” Wise application of fiscal policy—investment in infrastructure, for example (one that doesn’t rely on tax credits and projects with user fees)—could help pull more sidelined, prime-age workers into the job market, and could perhaps even help to boost productivity growth, by, for example, improving the quality of transportation infrastructure critical to supply chains.
But high tariffs, trade wars, wasteful tax cuts, deregulating financial markets (thus tempting future recession-inducing bubbles), whacking the safety net, and repealing the ACA will not support but will threaten the favorable jobs trend inherited by the president-elect.
In my experience, outside of recessions (when countercyclical policy is of great importance), presidents have a lot less to do with the good economic news for which they often take credit and the bad news for which they get blamed. That said, they can screw things up, especially when they’re guided by ideology, thin skin, and crony capitalism that pays back their funders. So stay tuned, as we’ll be tracking these developments as closely as ever.