The job market just keeps on getting stronger.

August 5th, 2016 at 9:24 am

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).

Source: BLS, my trend

Source: BLS, my trend

–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.

Source: BLS, my calculations

Source: BLS, my calculations

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).

Sources: BEA, BLS, Fed

Sources: BEA, BLS, Fed

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.

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3 comments in reply to "The job market just keeps on getting stronger."

  1. Smith says:

    I can’t imagine why it’s proper to discuss wages without mentioning falling energy prices. The latest report on past 12 months real wage increases says June 2015 to 2016 showed a 1.5% increase.
    The notation here says it uses CPI-U to deflate (adjust, or factor in inflation) for the all wages figure:
    CPI-U shows that lower energy prices are easily cutting inflation in half if not more so.

    Thus the wage gains are from a one time energy glut brought about by increased supply from fracking, lower demand from a weak global economy, and some producers increasing production to make up for lower prices (not entirely self defeating as consumer nations expand inventories while prices are low).

    One might note too that energy prices do have a floor, the effect of lower prices is more pronounced both in absolute terms and relative terms. After prices fall 70% from $100 to $30 a barrel, they can’t drop another 75% to $7.50 the next year, $25 to $30 is pretty much rock bottom. Even if they did, please note the 75% smaller impact, you’ve cut costs by $22.50 vs. $70 the year before. It’s the absolute dollar figure that matters to the economy.

    If you’re going to discuss wages increasing, then shouldn’t one at least mention
    1) The low wage increase of .5% after adjusting for oil. Generally don’t we always want to think about inflation that way too, what is core, and what is headline.
    2) What would happen if oil returning even partly to it’s previous level, say it doubled. You’re in stagflation land, real wage increases are zero or falling and at the same time inflation will appear to be accelerating, even though core inflation is largely unaffected.

    You can bet Republicans and financial sector would seize upon an uptick to argue for interest rate hikes. Where is the discussion that wages have gone basically nowhere so far?

    Am I missing something?

    • John San Vant says:

      Real wages rising 1.5% is some of the biggest this generation. Oil prices have always effected the consumption economy. When they go up, real wages fall, hurting future consumption. When they go down, real wages rise, boosting future consumption. At this rate, as the Saud’s reorganize, i see real wages not only recollecting their losses from the last recession, but then recollecting their losses from the 00’s oil boom driven real wage losses……..until they boost oil prices back up when the reorganization end.

      fwiw, the U-5 showed a pretty large drop. That was a good sign that some stability has come to SA and China. Now as the inventory cycle goes back into reboost, we see the U-6 follow suit over the next months.

  2. Smith says:

    Speaking of growth, the New York Times has a front page story in the Sunday paper with a rather twisted interpretation titled “We’re in a Low-Growth World. How Did We Get Here?”
    It claims:
    “In the United States, per-person gross domestic product rose by an average of 2.2 percent a year from 1947 through 2000 — but starting in 2001 has averaged only 0.9 percent. The economies of Western Europe and Japan have done worse than that.”

    This ignores the effect of the worst recession since the Great Depression, and the still incomplete recovery. GDP per capita rose closer to 1.7 % up to 2008, and 1.4% during recovery. Not stellar numbers, but not the .9% systematic structural inhibition painted in the story. Standard Keynesian economics says more fiscal stimulus is needed to restore growth because the 2008 recession was so big, and long, and deep. Rich people and the ruling class aren’t suffering, if anything they prosper, so this is not on their agenda.