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No News IS Good News: The American Jobs Machine Rolls On
Friday, Oct 07, 2016

The September jobs report was another occasion for the U.S. labor market to demonstrate its remarkable consistency. With 156,000 jobs created and only 7,000 in downward revisions to the prior two months, this was the 72nd consecutive month of positive net job growth – by far the longest stretch on record. The prior record was a mere 48 months. While the unemployment rate ticked up to 5.0% from 4.9%, there were plenty of offsetting and mitigating factors in the details of the household survey.

Overall, the report showed declining labor market slack and a continued modest deceleration of job growth – leaving the markets to yawn but the Fed to breathe a sigh of relief. For once, the data are falling in line with the Fed’s plans. And surely Fed Chair Janet Yellen is relieved to see the Fed slip out of the limelight ahead of the election.

The themes of the establishment survey (i.e., the actual payroll data) were broadly anticipated, so some of the most interesting details came in the household survey. While total unemployment inched upward, it did so for a good reason: labor force participation increased to 62.9% from 62.8%. Other encouraging signs were the declines in the number of people settling for part-time work (-159,000) and in the stubbornly high ranks of the long-term unemployed (-32,000).

While it’s certainly encouraging to see declines in these measures of labor market slack, it’s not obvious this will lead to a victory lap for the Fed’s doves. Debates about slack were important when it was really unclear where the unemployment rate would level off – once upon a time, serious people argued it might be around 6.5%. With the unemployment rate net unchanged over the last 12 months, it seems we have found the level. That’s an important leg for the hawks to stand on. Indeed, the FOMC statement dropped its reference to “underutilization of labor resources” back in March and the doves have already resorted to discussing productivity growth and the long-term growth outlook. As evidence of full employment mounts, the case for more Fed patience relies increasingly on estimates of the neutral fed funds rate and concerns about asymmetric risk, as in critiques from the likes of Larry Summers, but this year’s Jackson Hole symposium pushed back against the latter argument.

The leveling off in the unemployment rate coincides with the moderation in payroll growth: over the same period the 12-month average has declined from 235,000 to 204,000. For all the valid concerns about slack lingering in the form of underemployment and long-term unemployment, the core of the labor market appears to be reverting to form. As the economic expansion matures, job growth is slowing to the rate at which the U.S. can actually supply labor to its firms. This will help the Fed feel that it has its bearings as it heads into its next rate hike.

That said, where exactly was the job growth? In another confirmation of the status quo, it was concentrated in the three or four sectors that have received a lot of attention for their recent growth. About 90% of net job gains could be attributed to professional and business services (67,000), retail trade (22,000), education and health services (29,000), and construction (23,000) – most of the other job gains were washed out by losses in manufacturing (-13,000), transportation and warehousing (-9,000), and government (-11,000). Since losses were even more concentrated than gains, the payroll diffusion index declined only slightly, to 57.8 from 59.0.

In a sign that the energy sector may have begun to stabilize even before OPEC agreed to production cuts, mining and logging payrolls were flat – the first time they did not contract in exactly two years. The loss of manufacturing jobs was consistent with weakness in the employment indicator in the ISM manufacturing survey.

There was still no sign of wage inflation accelerating, but the year-over-year growth rate in average hourly earnings of 2.6% remained just shy of its post-recession high of 2.7%. This should also facilitate Fed consensus: wages are slowly grinding higher. Anecdotal evidence suggests wage pressures are broadening beyond high-demand sectors like software engineering, but we still haven’t hit any kind of inflection point that would force a faster schedule of rate hikes, which would upset markets and threaten the expansion.

Bottom line: another status quo jobs report showing gradual progress in the labor market, allowing the Fed to remain on hold in November, and look forward to a likely hike in December. Market-implied expectations for Fed rate hikes are little changed: 65% chance of at least one hike by the December meeting and the change of a second hike doesn’t rise above 30% -- and then only just – until June 2017.

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