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February Payrolls: Faster Job Growth, Slower Wages

March 9, 2018

There are no two-handed economists when it comes to the February employment report: strong job growth and a complete pullback on inflation fears make for a “Goldilocks” outlook for financial markets. At the same time, this report returns the Fed to head-scratching about its framework for reading the data. Policymakers are no doubt relieved to find they can be more patient with rate hikes, but they must feel confused about wage dynamics and where full employment lies. Fortunately, they have secured for themselves plenty of time to wait and see. Meantime, a hike at their March meeting is now all but assured.

The Highlights:

  • Nonfarm payrolls of rose by 313,000. Net upward revisions of 54,000 to the prior two months brought the 3-month average to 242,000 from a previously reported 192,000.
  • At 2.6% over 12 months, growth in average hourly earnings was below expectations and the market-moving January 2018 figure was revised down to 2.8% from 2.9%. An important driver was a corresponding rise and upward revision in hours worked. On net, wage trends appear unchanged relative to 2016 and 2017.
  • The “U3” unemployment rate held steady at 4.1%, its lowest level since December 2000, as labor force participation rose substantially (63.0% from 62.7%).
  • The “U6” underemployment rate held steady at 8.2%, as involuntary part-time work rose by 171k (much more than the 22k rise in unemployed persons). Contingent and part-time work are two “new normal” changes that are not going away.
  • The composition of the unemployment figures was particularly encouraging.

The Rundown:

Average hourly earnings and average hours worked effectively reversed their January dynamics. Both January and December earnings were revised downward for all workers. An important driver here was a corresponding upward revision to hours worked in January, and a furher rise in hours worked contributed to the earnings drop in February. All of this undercuts the notion that wage growth is breaking out of the range of 2.3-2.8% that it has held since the end of 2015. Note that the rise in the workweek implies solid aggregate income gains for consumers but also weaker productivity growth — good news for the near-term growth outlook but bad news for the long-term.

At a 3-month average of 242k, job growth was more than twice necessary to keep the unemployment rate falling. The diffusion index jumped to 68.6 from 58.9, reflecting the very broad job gains. The only supersectors to see deterioration were wholesale trade (5.8k vs. 8.5k prior), information (-12k vs. -16k), education & healthcare (23k vs. 63k), and lesiure & hospitality (16k vs. 39k). No one is worried about employment prospects in healthcare, and indeed growth in healthcare alone was quite steady (29.1k vs. 31.8k). Also, the travails of media and telecommunications firms are well known. More interesting was the pop in retail hiring (50.3k vs. 14.8k), which may reflect issues with seasonality, since retail hiring was unseasonably low in the prior few months. Other prominent industries saw notable upticks as well, including manufacturing (31k vs. 25k) and construction (61k vs. 40k). Construction was firing on both cylinders — both buildings and specialty trades — while manufacturing growth remained concentrated in durable goods, which is a positive for capital investment.

In the household survey there was plenty to like. Obviously, it is good to see more workers drawn into the labor force. That supports the Fed doves’ thesis of running the labor market a little bit hot, which is exactly what it looks like now. Less celebrated has been the composition of unemployment:

  • Increases in the ranks of the unemployed were concentrated entirely among the short-term unemployed — i.e., people who were previously outside the labor force — while those who have been seeking for a jobs for 5 or more weeks decreased.
  • Job leavers (64k) and new entrants (59k) vasty outweighed reentrants (-10k). While it would be nice to see discouraged (probably older) workers drawn back into the labor force, seeing first-time (presumably younger) entrants is a brighter sign for the future, since those workers have more years of participation ahead of them.
  • Unemployment rates among adult women, black / African American, Asian, and hispanic / latino groups all dropped.

That said, not all slack is created equal, and not all of it is going away. The underemployment rate was unchanged at 8.2%, as involuntary part-time work rose by 171k — much more than the 22k rise in unemployed persons. Contingent and part-time work appear part of a shift toward a genuine new normal for the U.S. labor market, consistent with trends in new technology and business models.

The Outlook:

This report will throw more water on the narrative in financial markets, if not among policymakers. After the January jobs report, financial markets fluctuated wildly, as fears rose that inflation was taking off and the Fed would have to hike more aggressively. Fed Chair Jerome Powell expressed skepticism that wage inflation was accelerating and it appears that markets took that skepticism to heart. Bond prices imply little or no change in expectations for a fourth hike this year: they still give that only about a 1 in 3 chance. The Fed is probably comfortable with that. In this environment of uncertainty, the Fed wants to preserve as much optionality as possible. They’re likely to lean gently against market consensus — i.e., talk up rate hikes just a touch — but they won’t be eager to firm up expectations until the second half of the year.

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