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Hanging Tough: U.S. Employers Shrug Off Recent Market Concerns
Friday, Mar 04, 2016

242,000 new jobs and unemployment steady at 4.9 percent

The labor market just delivered a resounding affirmation of the U.S. economy’s resilience. Recent hand-wringing about financial market volatility and headwinds from abroad had already started to give way to the realization that real, hard U.S. macroeconomic data – from retail sales to inflation and durable goods orders – was not only not turning down, but was in some cases improving. Still, there’s nothing like the Bureau of Labor Statistics jobs report. No other major U.S. data point is followed more widely or more closely.

These reports have a substantial amount of monthly volatility, but the 3-month moving average of 228,000 in net payroll growth is strong indeed. Your average investor or job seeker should be encouraged by these results, and this report will encourage the Federal Reserve to see that rate hikes this year remain not only feasible, but probably necessary.

There was strength throughout the two surveys that make up the report. The survey of employers showed that job growth was broad-based across industries on the service side of the economy, with the only true weak spot showing up predictably in the goods-producing sectors. No big surprises there: mining and logging (-18,000 versus -9,000 prior) continue to suffer from weakness in the energy sector, and manufacturing reversed some of its surprising January gains (-16,000 versus 23,000) as weak global growth and a strong dollar continue to weigh on exports. Construction posted another modest gain (19,000 versus 15,000), after warm weather in late 2015 led to outsized hiring in that sector, and the ongoing housing recovery suggests job growth should persist in this sector. However, the largest gains all came from the service side of the economy: education and healthcare (86,000, likely supported by seasonal factors), retail trade (54,900), and leisure and hospitality (48,000).

Despite some tantalizing signs of firming in the last few months, wage inflation remains evanescent. Average hourly earnings declined on the month and the year-on-year figure moderated to 2.2 percent from 2.5 percent. Details elsewhere in the report suggest this is because there is still some slack in the labor market – despite the low unemployment rate – in the form of the long-term unemployed who can be tempted back into looking for a job if their prospects improve sufficiently. The labor force participation rate rose for the second straight month (from 62.7 percent to 62.9 percent, the highest since January 2015). The number of people who are working part time because they cannot find full-time work was unchanged, suggesting that some of those long-term unemployed could only find part-time jobs.

The increase in labor force participation will partially vindicate Fed Chair Yellen’s assessment that there has been a lot of slack in the labor market and the Fed must raise rates very gradually. At the same time, the resilience of the labor market will increase policy makers’ urgency to continue with raising rates. With unemployment already so low, it may not be long before inflation begins to accelerate – and it is already firming – and that is a very large eight ball the Fed does not want to get behind. As Yellen and others have been at pains to note, if inflation rises too sharply, the Fed may have to hike rates more aggressively, even if that risks triggering a recession.

A rate hike in March seems very unlikely after recent market volatility and dovish comments from policy makers. Some economists foresee another rate hike in June, but the fed funds futures market doesn’t price in probability for another rate hike at higher than 50 percent until September. If policy makers want to adjust these expectations, they only have until Monday before the “blackout period” ahead of the Fed’s March meeting.

about the author

As chief economist at iCIMS, an industry-leading provider of talent acquisition software, Josh Wright leads a team of data scientists in analyzing emerging trends in the U.S. labor market