The April jobs report showed a tight U.S. labor market reasserting some of the dominant themes from the last few years. While it was encouraging to see the obvious bounce back from the lopsidedly weak March report, the details underlined a few outstanding puzzles: why the weakness in retail, and is that a bad sign for consumer spending? Why does wage growth remain so stubbornly tame, even as the labor market grows ever tighter?
Here’s the tally:
Payrolls continued to point toward weather effects in the first few months of the year. Once again, some of the most weather-sensitive industries swung from strength in temperate January and February to weakness in stormy March, then back in April. To varying degrees, that holds for construction (5,000 versus 1,000) and leisure & hospitality (55,000 versus 9,000).
Retail trade nominally fit the weather pattern (6,300 versus -27,400), but that’s where one of the puzzles shows up. Not only might you expect retail to see a stronger bump from the weather, but also retail payrolls are coming off a weak stretch (-56,100 combined over February and March, plus modest losses in October and November last year). Disconcertingly, this pairs with a soft patch in retail sales and consumer spending (which provides about 2/3 of U.S. GDP), to say nothing of long-term headwinds in the retail sector from the growth of e-commerce. Fortunately, overall job gains were well diversified, though, with the diffusion index rising to 60.2 from 58.8. Moreover, the uptick in the average workweek (34.4 hours from 34.3) should support a rebound in consumer spending and overall growth in the second quarter.
The household survey also looked strong. Alternative measures of labor market slack continued to decline, with a drop in long-term unemployment. Also, involuntary part-time work declined by an outsized 281,000 (to 5.3 million). While this led to a substantial decline in the underemployment rate (to 8.6% from 8.9%). The spread between this measure and unemployment still remains modestly elevated relative to its pre-Great-Recession average. The slight decline in the labor force participation rate (62.9% from 63.0%) was merely the reassertion of a long-term trend, which most economist had expected eventually anyway.
Wages provided something of a head-scratcher. 2.5% growth aligns with the more definitive quarterly Employment Cost Index, so on its face this is a non-story. Yet with unemployment so low, why isn’t wage growth picking up? 4.4% is at the lower end of what the Fed expects by the end of 2017, let alone the first half of the year, and slightly below what economists consider to be “full employment.” This discrepancy underlines outstanding debates about secular stagnation and productivity growth, but it won’t settle them.
In the near term, the Fed is likely relieved to see no sign of an inflationary cycle taking off. In the medium to long term, however, the moderateness of wage growth is concerning, because it calls into question the Fed’s framework for understanding current conditions. Job growth is showing some reassuring signs of moderating, but maybe 4.4% is not full employment after all, since we still have elevated underemployment. Indeed, that is part of why the Fed is already hiking slower than in the past, and slower than some traditional models would now advise. Yet if the models are wrong, then who’s to say we did not already blow through the sustainable unemployment rate — and that we should be more concerned about asset price inflation, if not wage inflation and consumer price inflation? While this job report seems to vindicate the Fed’s basic approach, it also reminds us that we remain in uncharted territory, and the balancing act remains a delicate one.
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.