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.