26 March 2018
Goldilocks Jobs Report Eases Inflation Fears in the U.S.
In the wake of the release of January’s jobs report, which saw a jump in average hourly earnings. Notice that the little bond bear has been awakened; but the equity bears are still tucked in their beds—albeit with the non-recession bear keeping a cautious eye on the situation. Courtesy of the February jobs report though, it looks like Goldilocks may have taken a step back into the building. For those not familiar with the analogy, an economy that’s operating “not too hot, but not too cold” is often referred to as a Goldilocks environment. We have been in such an environment as it relates to economic growth and wages/inflation for much of the current economic expansion. Yet the first market correction in two years was ushered in during the early part of February on the back of the aforementioned hotter wage data in the January jobs report—and the concomitant jump in the 10-year yield to about 2.9%.
Time to participate
The unemployment rate’s underlying details were quite strong. Household survey employment—the data from which the unemployment rate is calculated, and distinct from non-farm payrolls—surged by 785,000. In addition, the labor force participation rate rose 0.3 percentage points to 63%; which explains why the unemployment rate did not drop alongside the payrolls gain.
Importantly, within the labor force data is the participation rate of “prime age workers,” which are those between 25 and 54 years old. That rate continues to accelerate and currently sits at 82.2%. Attention is often focused on this range given that education and/or retirement are lower influencers and therefore don’t skew the data.
Wall Street happier than Main Street?
Less positive for workers was wage growth. Average hourly earnings (AHE)—the most common measure of wages—were up 0.1% month-over-month, which was below the 0.2% consensus. Garnering more attention was the year-over-year change, which fell to 2.6% from 2.8% the prior month (which in turn was revised from 2.9%). It is still up from the 2.5% average last year, but was a disappointment for workers nonetheless.
Does anyone think wage growth was accelerating during the worst recession since the Great Depression? Of course not. What was happening is that a majority of workers losing their jobs during that recession were on the lower end of the wage spectrum, which biased up the average. The opposite has been a factor in the expansion’s subdued wage growth. Baby Boomers are retiring in greater numbers—and they tend to be on the higher end of the wage spectrum. On the other hand, Millennials are experiencing stronger job growth—and they tend to be on the lower end of the wage spectrum due to their younger age. Those forces have conspired to bias down the average.
This is why “median” measures of wage growth are also tracked by market watchers and economists. One such measure—which tracks the median percent change in the wages of workers observed 12 months apart—is the Wage Growth Tracker from the Federal Reserve Bank of Atlanta. Although it’s recently rolled over, you can see that wage gains via this measurement criteria have been running at least 0.5 percentage point above AHE.
A JOLT of good news
Although it’s not reported in conjunction with the monthly payroll jobs report, there is another series of jobs data that garners attention and comes from the Job Openings and Labor Turnover Survey (JOLTS), which is conducted by the Bureau of Labor Statistics. The data includes employment, job openings, hires, quits, layoffs and discharges, and other separations.
Job openings are just off a recent all-time high, but importantly, the number of unemployed for each job opening has fallen from a peak of 6.6 in 2009 to just above 1.0 today. That means there is nearly one job available for every unemployed worker—helping explain the jump in labor force participation.
The net is that the U.S. economy continues to be able to create enough jobs to both accommodate the re-emergence of job hunters and keep the unemployment rate in a declining trend. At the same time, relatively tepid wage growth should keep near-term pressure on inflation from heating up. For now, it’s being cheered by the stock market, but a revival of frothy investor sentiment represents a risk worth watching given its contrarian tendencies.
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About the author:
Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.