Jobs report: Calm before storm as the virus hasn’t hit the job market…yet

March 6th, 2020 at 9:22 am

In yet another upside surprise to the U.S. labor market, payrolls grew strongly last month, up 273,000, well above expectations. Upward revisions to earlier months show that contrary to what many have expected, the monthly pace of job gains has accelerated in recent months. The unemployment rate held steady at 3.5 percent, but wage growth, which has been remarkably unresponsive to strong labor demand, remains a soft spot, stuck at 3 percent, year-over-year, just slightly ahead of consumer inflation which is running at around 2.5 percent.

Calm before the storm

As our smoother shows, averaging monthly payroll gains over various time spans, over the past 3 months, payrolls are up 243,000 per month. Over the past year, they’re up less than that: 201,000. Given that most labor market analysts expected employment gains to slow as we closed in on full capacity in the job market, this acceleration is quite remarkable.

However, there are two counterpoints to this positive development. First, wage growth is also remarkable, but not in a good way: at 3 percent over the past year, it’s surprisingly soft given these job gains and persistently low unemployment rate. Second, as regards the impact of the coronavirus on today’s numbers, it’s important to recognize that jobs reports are coincident, if not lagging, indicators. As of today, clear disruptions to both the global and US economy are growing increasingly clear in the data, from sharply reduced airline traffic, to supply chain disruptions, to falling consumer confidence. Forecasts are even more uncertain than usual in this climate–we still don’t know how many people and places will be hit by quarantines, closed workplaces and schools, or even by Covid-19, the illness caused by the virus.

But that said, my guess is that GDP growth sharply decelerates in at least the first half of this year. In that regard, I view this jobs report as the calm before the storm. There was a slight bump up in involuntary part-timers last month, which could be a harbinger of what’s to come, as labor demand gets hit by virus-induced decreased consumer demand, but it is a distinct possibility that in a few months, we’ll longingly look back on this report.

What’s not up with wage growth?!?

Both figures–the first for all private-sector workers, the second for middle-wage workers–show a deceleration in trend wage growth. How does that square with such a strong job market on the jobs side? One explanation is that this particularly series is weaker than others, but in fact, most series roughly agree that wage growth is, if not slowing down, not speeding up. Another is that workers just don’t have the bargaining clout needed to press for the types of gains we’d expect in such tight conditions. This is surely part of the explanation, though it’s tricky then to puzzle out why wages were growing at a good clip a relatively short while back.

Not at full employment

Another explanation, one consistent with econ 101, is that increased labor supply is meeting strong labor demand. The surfeit of available jobs is pulling new workers in off the sidelines and allowing incumbent workers to increase their hours. Some indicators, especially the fact that employment rates have increased over the past year, suggest there’s something to this explanation. The critical implication is that there’s still “room-to-run” in the U.S. job market. It is not at full employment.

This next figure underscores that case using price data, both the price of goods and labor (i.e., wage growth). The unemployment rate has been below the Fed’s estimate of the lowest rate consistent with stable inflation–their so-called “natural rate”–for about two years! But not only has inflation consistently missed the Fed’s 2 percent target from the downside; we now observe wage deceleration. Based on these relationships, I simply do not think there’s a coherent argument that the U.S. labor market is at full capacity.



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3 comments in reply to "Jobs report: Calm before storm as the virus hasn’t hit the job market…yet"

  1. Dave says:

    Everything is a matter of balance.

    How are we going to deal with this? We’re going to put it in balance.

    First, we need to know how long it will take to get a viable vaccine.

    When we know that, then we can make a plan. We have to plan for that outcome. We’re going to create a vaccine.

    We have to put in to balance the cost of shutting things down vs. keeping things working.

    We have people saying this will cause a huge depression. We know that isn’t acceptable. How do we know that? We know that economic depression costs lives. Lots of lives, tangible and intangible. But how many lives compared to those that could be lost with this virus?

    We have to put things into perspective.

    We’re going coordinate with the CDC and others to know the timeline for vaccine viability, which is the time when the vaccine can hold off the virus long enough to keep things working normally in the economy.

    Generally, this is like a bad flu for which we have no current vaccine.

    We’re going to treat it as such. We’re going to stop it as we can, temporarily, but then we’re going to go back to normal.

    Many people will die. The reality of lives lost must be quantified by the CDC.

    We’re going to reopen the economy to normal activity based upon their numbers combined with our knowledge of the effects of a shutdown on the economy.

    The worst case is that this should affect the economy about the potential number of lost lives, which is about 1%. But we can’t be acting effectively if we cause damage beyond that, which a total shutdown currently does.

    We can project that a 1% loss of life is tragic, and that it will cost the economy maybe 1.5% as a result, but we have to go on.

    So after this initial shutdown, we’ll reevaluate.

    We can’t lose more than 2% of the economy to protect 1% of the population. It would be irresponsible to do so.

    A good president would say something like this.

  2. Lee Hirz says:

    It doesn’t make sense because he has a totally different world view. I am worried that the pResident is trying to bring on the plague so he can use it to cancel elections as a national emergency, like happened in Germany when the National Socialists came to power. He isn’t dumb. He just doesn’t read, is ignorant and an egotist. But much of what he does is purposeful in ways that are very devious. So, he probably knows, like I do that the virus will come in waves and that this is the first, but maybe not the worst wave, like all other plagues in history, including the 1918 Flu. If he can talk people into doing doing what will allow Covid-19 to flourish, the 2nd wave will come in the fall. Then he can say, I did the wrong thing in March/April, we need to look the country down and really stop this horrible thing.close the polls, keep people isolated from each other, no gatherings, bring out the army…

    He says it is about economics, but is it? Divide and conquer, get the young job needers to be against the old who will die while the young think they won’t. He also said he called it the China Virus because that is where it is from when we know it is a dog whistle. And 2 elderly people died (more coming?) because he told everyone that a certain drug treats the virus.

    People need to do everything to make sure that the elections will happen in November. Getting the virus may not be the only problem.

  3. Moses McCall says:

    Hi Jared,

    With congress passing this 2 Trillion dollar stimulus package, it provides some temporarily economic relief in an uncertain time, but what should I be long-term concerned about: inflation, increasing debt the country is paying.