Employers added 255,000 jobs last month and the unemployment rate held steady at 4.9% in yet another strong report on the conditions of the US labor market. The job market is clearly on the path to full employment and solid monthly gains are particularly evident once we average out the monthly volatility in the data (see smoother below). Importantly, this is happening without any signs of overheating: inflation remains low, consistently below the Fed’s target rate.
Today’s report yields many positive indicators:
–The pace of job growth over the past 3, 6, and 12 months is around 190,000-200,000, a strong trend that should put downward pressure on the jobless rate.
–Payroll gains were revised up slightly—by 18,000—over the prior two months. May’s 24,000 blip up on payrolls was clearly an outlier.
–In one of the indicators I’m watching most closely, the labor force participation rate has ticked up slightly over the past couple of months. It’s too soon to recognize this as a trend, but it’s consistent with the tightening job market pulling in previously sidelined workers and thus promising.
–Wage growth is responding to the tightening job market. A year ago, wages were growing around 2% per year; they’re now up 2.6% over the past year and as the figure below shows, there’s a recognizable trend there. With overall inflation running around 1%, that translates into real wage gains (“Yellen’s benchmark” refers to her statement that wage growth of 3.5% is consistent with stable inflation).
–In another sign of growing labor demand, average weekly hours ticked up slightly, while 64% of private sector industries added jobs last month, a tick up from June’s 62%.
The smoother shows the positive trend in payrolls: as noted above, averaging over various time horizons, we’re adding about 190K-200K per month.
There are, as always, some clouds in the sky. Underemployment, still elevated by just under six million involuntary part-timers, was 9.7% last month, about a percentage point above what I consider to be its full employment rate (though down from 10.4% a year ago). Factory hiring picked up a bit in the past two months, adding 24,000 cumulative jobs in June and July. But that’s still low and the sector is clearly underperforming. Labor force participation remains too low, especially among prime-age workers (25-54).
Wage growth, as noted, has accelerated by about half-a-percent, from around 2 to 2.5%, year/year. But that’s still actually pretty tepid wage growth given how low the unemployment rate is, a strong indicator that we’re not yet at full employment.
This observation is also, of course, highly relevant for the Fed. The following figure packs in a lot of relevant information on the inflation/unemployment tradeoff that’s behind the Fed’s “Phillips Curve” model. The figure includes the unemployment rate, the Fed’s estimate of the “natural rate”—the lowest unemployment rate they believe to be consistent with stable inflation at the 2% target—year-over-year wage and price growth (using the core-PCE deflator, the Fed’s preferred inflation benchmark right now).
As you see, the unemployment rate is about where the Fed sets its natural rate. Based on their underlying model of how these relationships work, that means inflation should be picking up. Clearly, that’s not the case. The Fed is still consistently missing their 2% target by a long shot.
This strongly suggest Goldilocks conditions in the job market—the engine of job growth is percolating at a solid clip, wage growth is picking up a bit, but there’s no evidence of overheating. This is not a job market begging for a rate hike to slow it down.
Prior to the report, futures markets pegged the likelihood of a Fed rate hike at their September meeting at 12%; last I checked, that’s up to 18%. That’s still low, and Chair Yellen has consistently been attuned to the dynamics I’ve described.
So, steady as she goes at the Fed; let the job market continue to improve unfettered by any break-tapping.