Another solid jobs report, but wage growth NOT pushing up price growth (so chill, Fed…)
// Jared Bernstein | On the Economy
Payrolls were up 178,000 last month and the unemployment rate fell to a nine-year low of 4.6 percent, in yet another installment of solid, monthly job reports. Wage growth was flat in November, manufacturing jobs are down, and the labor force contracted slightly, so the report was not uniformly positive. But the job market continues to close in on full employment, and the Federal Reserve is unlikely to see anything in today's report to prevent them from tapping the brakes with an interest rate hike at their meeting later this month.
Below, however, I argue that the absence of inflationary pressure should make them think twice before slowing a labor market that's finally delivering jobs and (looking at the trend versus just November's data) wage gains to workers who've long been left behind.
Also, in today's write-up, I feature a quick comparison of two job markets: the one inherited by president-elect Donald Trump and the one inherited 8 years ago by Barack Obama. The difference is really something.
Smoothing out the monthly bips and bops, we see that the 178,000 payroll gain is very much in lockstep with the underlying trend in the pace of job creation. As revisions slightly lowered gains in the prior two months, the patented JB smoother shows that average monthly job gains in the last three months were 176,000. That's a slight deceleration from the 205K pace over the past 6 months, but broadly speaking, we're adding north of 170K jobs per month this year, a pace of job growth that should be plenty fast enough to keep the job market on target for reaching full employment at some point later next year.
But isn't 4.6% unemployment at or below most people's definition of the lowest unemployment can go without triggering spiraling price growth? Yes, but there are very important mitigating factors.
–The underemployment rate, which also fell last month, is, at 9.3%, still well above its full employment level, which I judge to be around 8.5%. This rate captures slack that's not in the headline rate, including involuntary part-time workers. As the job market tightens, the number of such workers is solidly trending down (down about 400K over the past year, to 5.7 million), a clear and positive symptom of job market improvement. But this key indicator is still too high.
–The labor force participation rate is still too damn low. As noted, the labor force contracted a bit last month and this contributed to the decline in unemployment. While the size of the labor force is a very noisy monthly number, it should be noted that the less noisy participation rate remains, at 62.7%, historically low. Some of that has to do with demographics and retiring boomers. But the employment rate of 25-54 year-olds is still only slowly climbing back to pre-recession levels, and 8 years into the recovery, has only regained 60% of its recession-induced loss.
–Perhaps most importantly from the Fed's perspective, wage growth is NOT bleeding into price growth (see below).
The report, as noted, includes a few less positive results. Manufacturing remains a real weak spot. Employment in the sector is down slightly each of the last four months, including 4,000 last month. This year, factory sector jobs are down 60,000; over a comparable period last year (Jan-Nov, 2015) they were up 20,000, and in 2014, they were up 186,000. This pattern links closely to the appreciation of the dollar, which makes our manufactured exports less competitive in foreign markets. It's also a politically timely observation, suggesting were going to need much more thoughtful and systemic policy than president-elect Trump's recent Carrier plant intervention.
Wage growth was surprisingly flat over the month (down 0.1%), but that's probably mostly give-back from last month's 0.4% pop. You've really got to look at the year-over-year trend for average hourly wages, which shows a 2.5% gain over the past year, very much on a trend that's up from about 2% a year ago. In fact, if we average this wage series over the past three months and compare to the average for the three months before that, it's growing at a 2.9% annual rate.
Which brings me to the Fed point. Today's report will be scrutinized for evidence as to the Federal Reserve's plans to raise the benchmark interest rate they control when they meet later this month. Before this morning's release, futures markets put a 93% probability on a rate hike. After the release, that rose to 95%.
Those probabilities speak to the "will they" question. But should the Fed raise?
This is much less obvious. Yes, there is good evidence that the tightening job market has boosted workers' bargaining clout, leading to faster wage growth (see the first scatter plot below). Given the long, dry, slack-driven period for wage growth, this is an unequivocal plus.
The risk, from the Fed's perspective, is that as the labor market hits utilization constraints that come with full employment, faster wage growth will bleed into faster inflation, and that invokes part 2 of their mandate: 1) full employment at 2) stable prices.
But the second figure shows no such bleeding and ergo no need to suture the non-existent wound with a rate hike (along with no need for such stretched metaphors).
Finally, and I'll have more to say about this later, let's use a few indicators from today to look at the job market that president-elect Trump is inheriting compared to the one President Obama inherited. The table below shows various indicators from November 2008 compared to those from last month.
The difference is remarkable. Remember, presidents get credit and blame for many economic outcomes over which their policies have little impact, so a lot of what goes on in terms of the nation's impression of their economic effectiveness, at least initially, is basically luck.
When it comes to the inherited trend, Obama basically was "catching a falling knife." Payrolls fell a horrific 769,000 in the month he took office. The unemployment rate was about 7% on its way up to 10%.
Conversely, Trump is climbing aboard a very favorable trend, with steady job gains delivering low unemployment and increasing wage gains.
Like they say: If you can't be good, be lucky.
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