19 January 2021

Robust Jobs Report Means Fed Can Carry On

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The May U.S. Employment Report was excellent, exceeding expectations on all fronts. Establishment payrolls rose 223,000; the unemployment rate fell further to 3.8 percent, far below estimates of “full employment;” and wages rose 0.3 percent, exceeding expectations. This report sets an encouraging tone for strong economic growth.

Job gains have averaged 207,000 per month so far this year, higher than its 2016 (195,000) and 2017 (182,000) average.

The 3.8 percent unemployment rate tied April 2000 for the lowest rate since December 1969. The Household Survey registered a 281,000 decline in unemployed — it has fallen 641,000 in the last three months. The Fed estimates the natural rate of unemployment to be 4.5 percent; the CBO 4.6 percent.

Average hourly earnings rose 0.3 percent month over month, lifting its year on year change to 2.7 percent. Reports of labor shortages are becoming more widespread, and wage pressures are gradually increasing. I expect this upward pressure to become more pronounced as labor markets tighten further and if nominal GDP and productivity growth continue to pick up.

Job growth above 200,000 at this mature stage of expansion is impressive, pointing to a larger-than-expected potential labor supply and business optimism that underlies the quickened pace of hiring and investment. This year has been turbulent for financial markets, and there are a slew of global trade and geopolitical uncertainties, but firms are looking past the distractions and focusing on fundamentals. The resurgence in business sentiment in May supports the strong jobs report.

By industry, the service-providing sector dominated as usual, with a 171,000 increase, but the goods-producing sector also added a strong 47,000 jobs. Construction payrolls rose by 25k, increasing by a total of 138,000 this year. Labor shortage complaints have been the loudest in construction, and wages are rising very quickly there as a result.

Manufacturing payrolls rose by 18,000 and mining employment increased by 6,000 as higher oil prices continue to drive hiring and investment in the sector.  Retailers are adding jobs again — after reducing payrolls by 29,000 in 2017, they have increased it by 109,000 thus far this year, with an increase of 31,000 in May.

Average hourly earnings surpassed forecasts this month, even overcoming a downward bias from a calendar quirk. To be sure, 2.7 percent year on year wage growth is not spectacular, but is clearly heading up.  A relatively high net share of small businesses, 20 percent, plans to raise worker compensation in coming months.

Surprisingly, aggregate hours worked, the earliest proxy of broad economic activity, increased by only 0.2 percent month over month, as the average workweek remained unchanged at 34.5 hours, pointing to only steady economic growth.

The combination of the job gains and pickup in wages implies strong growth in disposable incomes and will support consumer confidence. Indeed, aggregate weekly payrolls that combines earnings, hours worked, and employment rose by a solid 0.5 percent month over month and should support May’s consumption.

The Household Survey was equally strong, as its measure of employment increased by 293,000 and unemployment dropped 281,000. The labor force participation rate for the prime working-age cohort actually fell to 81.8 percent, retracing its year-to-date gains. The number of voluntary job leavers continued to increase, signaling strong confidence in job-finding prospects. Sustained increases in labor market churn will place upward pressure on wages.

This is the last employment report before the Fed’s June 12-13 FOMC meeting and it keeps the Fed on track to increase its Fed funds rate target.  I expect the Fed to raise rates at each quarterly meeting in 2018: with the very low unemployment rate, solid growth of real GDP (I forecast 3.7 percent for Q2), and inflation near two percent the Fed will have a hard time justifying any pause in its policy normalization.   

Click here for the original article from Economics 21.  

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