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Saturday, December 9, 2017

Jobs report: Another strong month as payrolls settle into solid trend, but wage growth still underwhelms [feedly]

Jobs report: Another strong month as payrolls settle into solid trend, but wage growth still underwhelms
http://jaredbernsteinblog.com/jobs-report-another-strong-month-as-payrolls-settle-into-solid-trend-but-wage-growth-still-underwhelms/

The US labor market continues to add jobs at a strong clip, as robust consumer demand is generating a virtuous cycle of job growth, increased weekly hours, wage growth (though see ongoing caveats below), and hiring. Payrolls were up by 228,000 last month, above expectations for about 190,000. The unemployment rate held steady at 4.1 percent, a 17-year low.

Our official monthly jobs smoother filters out some of the noise in the payroll data by taking monthly averages over the last 3, 6, and 12 months. The fact that the bars are all about the same height reveals the underlying trend in job growth to be around 170,000 per month, a healthy pace for this stage of the recovery. As labor markets close in on full employment, job growth slows a bit as workers become more scarce.

However, given the movement of other key variables, namely, wages and prices, the full-employment, full-resource-utilization case cannot yet be made, as I show below.

Once again, hourly wage growth is a sore point. The two figures below show yearly wage growth for all private-sector workers and for the 80% of the workforce that's blue-collar in goods production or non-managerial in services. In both cases, the 6-mos moving average reveal a flattening trend. Basically, in 2015-16, the tightening job market drove wage growth up from 2 to 2.5 percent, around where it has been stuck since. In fact, that's precisely last month's yearly growth rate for all private workers (2.5%). Given the consumer inflation has been running at around 2%, that's but a small hourly wage gain in real terms, and certainly less than I'd expect given a 17-year low in the jobless rate.

 

That said, other series show stronger wage growth, as Dean Baker and I point out here, especially for middle-wage and minority workers, so the jury's not in on the mystery of the missing wage growth. All told, in a series that mashes together 5 different wage series (which I'll post later) we see a mild acceleration, but again, less than would be expected.

Also, hours worked per week ticked up last month and weekly earnings were up 3.1%, the strongest weekly growth rate since early 2011.

One theory is that the job market is pulling less skilled and experienced workers in from the sidelines, and this is holding down wage growth. But the Atlanta Fed tracker, which tries to control for this, doesn't show much acceleration either.

All of this creates a challenging dynamic for the Federal Reserve. The next figure shows how the current unemployment rate of 4.1% is below the rate the Fed's "natural rate," i.e., the lowest jobless rate consistent with stable prices. But neither prices (core PCE, the Fed's preferred gauge), which recently went through a bout of DEcelleration, nor wages, are responding much at all to low unemployment.

Are there, then, measures of labor demand that do not show a fully tight labor market? In fact, labor economists consider the employment-to-population ratio of prime-age (25-54) workers is a quick proxy for this question. This rate fell from about 80% before the last recession to 75% at its trough. It's now at 79% so it has clawed back about three-quarters of its losses. In other words, it's possible that the labor force still has some room-to-run and that labor demand, as strong as it is, still hasn't exhausted labor supply.

Turning to sectors, manufacturing had a strong month, picking up 31,000 factory jobs last month. So far this year, manufacturing employment is up an average of 16,000 per month, compared to about zero last year. That's partly due to stronger growth abroad pulling in more of our exports, but the dollar has gained strength of late, and that could dent these gains going forward, as the stronger dollar makes our exports more expensive relative to imports.

Retail trade stores added about 19,000, which is the biggest gain for the sector in a year. The strong job market could help the sector as the holiday season gets underway, but brick and mortar stores are of course in heated competition with online sellers. (Note: these data are adjusted for seasonal hiring effects, so any gains reflect jobs added above the usual seasonal pattern.)

Surely, some politician will say something foolish about how the solid November report reflects the tax cut that's working its way through the Congress. If I could, I'd issue fines for such statements ($1.5 trillion sounds about right). As the smoother graph shows, we're right on a trend that's been ongoing for years now. As noted, there's real momentum in the economy, with job gains, if not much in real hourly wage gains, boosting household incomes.

The challenge for policy makers, especially at the Fed, is to not get spooked by the strong quantity numbers (jobs) when the "price" measures–wages and inflation–are not flashing red at all.


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