Payrolls rose 313,000 last month, well above expectations, and the unemployment rate held at 4.1 percent, as wage growth moderated a bit from last month’s pace (up 2.6 percent, yr/yr). Though these monthly data are notoriously jumpy, the out-sized job gains were accompanied by a nice pop in labor force participation rate–up 0.3 percent to 63 percent–suggesting that the hot labor market may be pulling new workers in from the sidelines. If so–if this turns out to be more of a trend than a blip–this has important, positive implications for the increased “supply-side” of the economy, implying more room-to-run than many economists believe to be the case.
This was the first over 300K month since July 2016, and the jump in labor force participation comes after the rate was stuck at 62.7 percent since last September. However, both of these values jump around and so our monthly smoother provides a look at the underlying trend in job growth by taking 3, 6, and 12 month averages of the monthly changes.
This month, the smoother tells a surprising story. Typically, as economies close in on full employment, we expect the rate of job gains to slow, as the labor market nears its capacity. But the smoother shows the opposite pattern, that of a (slightly) accelerating trend. For example, over the past three months, the average monthly job gains come to 242,000, but over the last 12 months, they amount to a lower 190,000. We should be careful not to over-interpret even these smoothed numbers, but the punchline is that it’s hard to make a case that employment growth is DEcelerating, as would be the case if the economy’s water glass, if you will, were full to the brim.
This question of how much room-to-run exists out there is leading, as it should, to close scrutiny of wage growth for signs that job market pressures are pushing up paychecks. The figures below show yearly hourly wage growth (along with a smoother trend) of both all private sector workers and the lower paid 80 percent who are blue-collar or non-managers. The wage pop that spooked markets last month (Jan17/Jan18) was revised down slightly, from allegedly scary 2.9 percent to 2.8 percent. As noted, this month’s wage pace slowed a bit to 2.6 percent.
Again, the smooth trend (6-mos average, in this case) in wage growth deserves a close look, and it shows remarkably little acceleration given the persistent tightness of the job market. I’ll discuss why that may be occurring in a moment, but in fact, there’s a bit more there than meets the eye. Taking annualized growth rates of quarterly averages reveals more wage acceleration: 2.9 percent over the past three months compared to 2.5 percent last spring. This suggests perhaps a bit more pressure than the annual growth numbers reveal, which is, of course, what we’d expect at this point.
That said, there’s just no story right now, at least in the actual data (as opposed to expectations), of an overly tight job market leading to inflationary wage gains. The figure below shows some of the key indicators from the Fed’s dashboard, including unemployment, the Fed’s guess at the “natural rate” (the lowest unemployment rate consistent with stable inflation), actual inflation (PCE core, the Fed’s preferred gauge), and the Fed’s inflation target of 2 percent.
As you see, unemployment has been below the Fed’s “natural rate” for about a year (!) and both inflation and wage growth remain subdued. In other words, the links in the chain that go from a tight labor market, to faster wage growth, to faster inflation, remain uniquely weak.
There are surely many reasons for this, not all of which are understood. Productivity growth is lower, which tamps down potential wage growth. But also, worker bargaining power looks weaker than it should be at low unemployment. That’s partly because the unemployment rate isn’t telling the full story. Consider the prime-age (25-54) employment rate. Its peak in 2007 was 80.3 percent and its trough was 74.8 percent. Last month, it popped up three-tenths to 79.3 percent, thus it has recovered 4.5 out of 5.5 lost points. Given the population of these workers, each point amounts to 1.3 million potential workers added to the labor force. In other words, while there’s no question that there’s less slack in the job market, it’s very likely a mistake to conclude there’s no slack left.
A few more details:
–Warmer February weather compared to a harsh January may have played a role in the big jobs pop. The strong construction number (61,000 jobs added) may be evidence of that effect.
–Retailers (brick and mortar stores) got an off-trend-to-the-upside bump of 50,000. I suspect that trails off in coming months.
–Manufacturing, perhaps helped by the weaker dollar, continues to post decent gains, and is up 224,000 over the past year.
–Black unemployment, which spiked last month, fell back down to 6.9 percent, close to its historical low, suggesting the tight labor market is helping to employ minority workers. Still, the black rate remains close to twice the white rate.
This morning I read a pretty typical market take of the current job market. Economists at Barclays Bank wrote: “Looking ahead, we will view solid growth in employment less favorably.”
While I’m sorry in this analytic context for getting my class warrior on, why must Wall St. begrudge Main St. right now? The answer is high pressure job markets threaten wage gains which threaten both profit margins and inflation. Well, we’ve had too few wage gains relative to profits, and not enough inflation. So I, for one, will be looking at more reports like this one “more favorably.”