This was a good jobs report, but an un-loveable one – at least for the wonks (economists, journalists, and policy makers). The overarching message was that, with months of hurricane-related volatility behind us, the U.S. labor market remains in very strong but somewhat puzzling condition. Job growth was high and broad-based, hours worked rose, and less educated workers saw unemployment fall, yet underemployment ticked up and wages remain stubbornly rangebound. Make no mistake: for workers and employers, it was good news for the near term, but the November jobs report underlined a few concerns about where the U.S. economy is headed over the next year or two.
Here’s the cheat sheet.
If you discount the last two months, these payrolls figures were the strongest since February. The gains were quite broad: the diffusion index was a robust 63.0, with only utilities and information declining, and each of those by 4,000 or less. On the heels of Black Friday, retail trade posted a solid rebound (18,700 vs. -2,200 prior) and manufacturing had a big month (31,000 vs. 23,000), consistent with strength in recent factory surveys. There was some sign of hurricane reconstruction efforts underway: construction accelerated (24,000 vs. 10,000), but that outstripped transportation/warehousing (10,500 vs. 7,600). Overall, job growth was at a pace more than twice that believed necessary to absorb new workers and hold the unemployment rate steady.
In light of all that, it was puzzling to see such middling wage growth. The 0.2% rate on the month was only a slight disappointment relative to expectations for 0.3%, but combining that with downward revisions to the prior months brought the year-over-year rate to 2.5% – the bottom of its range since April 2016 (excluding the hurricane-depressed October 2017 figure). This seems largely to be part of the broader mystery about low inflation, in which globalized labor markets and technological disruption undermine the dynamics predicted by traditional economic models. Slumping inflation expectations are probably taking a toll too. It’s also conceivable that we have residual slack in the U.S. labor market (traditional models would predict payroll growth and unemployment declines to have slowed by now) but most economists believe that the slack is gone or nearly so.
That brings us to the household survey. The unemployment rate did hold steady this month, which could be a sign of normalization, but it had already declined this year twice as much as in 2016, despite modestly slower payroll growth than last year. Like tepid wage growth, that rapid decline is another puzzling point, and may yet partially reverse. There were signs of tightness in the progress posted by some groups that have faced more challenges: the long-term unemployed, minorities, those without a high school degree, and those with some college or an associate degree. Those groups face structural challenges more than cyclical ones, so this isn’t strong evidence of slack. On a related note, labor-force participation held steady and looks set to close out 2017 at the same level it reached at the end of 2014; that suggests labor market tightness is roughly offsetting the demographic headwinds to participation in the U.S. The uptick in underemployment and involuntary part-time workers may just be survey noise, but it’s tempting to read this as a sign that part-time work is going to remain a larger portion of the U.S. economy. Even if the gig economy has been overhyped at times, it is hard to imagine its novel technological platforms and business models surrendering the territory they have already acquired.
Aside from wage growth, underemployment, and some familiar concerns about economic theory and structural challenges for disadvantaged groups, what other issues in the U.S. economy does this jobs report underline? A potential collision course for fiscal and monetary policy. The Fed’s December rate hike would be all but assured by this jobs report and other economic data, but the likelihood of tax cuts at a time when growth is above trend, asset prices are high, and unemployment is low will put extra pressure on the Fed to accelerate rate hikes next year. Indeed, the outlook for 2018 is what markets will be focused on at the conclusion of the Fed’s meeting next week. Up until now, the Fed’s challenge has been to withdraw its extraordinary crisis-fighting measures and aim toward a more normal policy stance. Now they face the prospect of an outright tightening cycle, just as fiscal stimulus begins to hit the economy. That will require striking a different kind of balance, and it will be new leaders trying to strike it. The rest of us need to keep our eyes on the horizon.
As iCIMS’ former chief economist, Josh Wright led a team of data scientists in analyzing emerging trends in the U.S. labor market. With publications ranging from academic journals to national media, Wright previously served as a U.S. economist with Bloomberg L.P., and was a staff researcher at the Federal Reserve.