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BK Blog Post
Posted by Jared Bernstein.
From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.
Payrolls increased by 215,000 last month and the unemployment rate held steady at 5.3%, according to this morning’s jobs report from the BLS. It’s a solid report, showing that the labor market continues to gradually tighten. Yet by a number of important metrics, most notably the absence of faster wage growth, the report suggests that the job market’s steady progress is not generating inflationary pressures.
Most industries added jobs, revisions added 14,000 jobs to May and June’s tallies, and average weekly hours ticked up slightly. The share of involuntary part-timers, an important indicator of slack, fell slightly, to 6.3 million. That’s still an elevated number for this measure, but it’s down by over 1 million workers from a year ago. Thus, the more inclusive underemployment rate, which includes part-timers who want full-time work, ticked down to 10.4%, the lowest it has been since June 2008.
At the same time, the closely watched wage gauge remains stuck in neutral, up 2.1% over the past year. What about more recent trends? If I average the wage over the last three months, and take an annualized growth rate over the prior three months, I get…wait for it…1.9%.
In other words, by this, and by the majority of other wage metrics, the tightening labor market is not creating inflationary wage pressures.
Why not? One reason is that the job market is not as tight as the 5.3% unemployment rate implies. The historically low labor force participation rate was unchanged in July, after falling 0.3 tenths of a percent in June. And while underemployment is coming down, it’s still elevated.
Thus, the message to the Fed re the job market: love it and leave it alone. The ongoing recovery is generating a steady flow of job creation with no obvious evidence, either in actual data or expectations, of the need to “tap the brakes” with a rate hike.
Employment increased broadly across the industries (64% of industries added jobs, an uptick from the prior two reports). Though the strong dollar has been holding back jobs in export sectors in recent months, manufacturing did a bit better in July, adding 15,000 jobs, exclusively in non-durables (durable manufacturing shed 8,000 jobs). Still, thus far this year, factory jobs are up by about 50,000 compared to over 100,000 over the comparable period last year.
The monthly smoother shows average monthly employment growth of 235,000 over the past three months, and longer look-backs show job creation to have settled into a trend comfortably north of 200,000/month.
One way to get a sense of how job growth has evolved over time is to dig into the OTE archives for smoothers from the past. The next figure shows how if you go back a few years, to 2012 (averaging over the same months as the above figure), you see job growth coming in at lower levels and decelerating. The six month average over the summer of 2012 was about 150,000 per month, about 50K below today’s six-month average.
The Fed and the current job market: certainly one of the biggest outstanding policy issues for the US job market and economy more broadly is when (and how fast) the Fed will raise the interest rate it controls (the Fed funds rate, or FFR) to slow the economy down in order to meet their dual mandate of full employment amidst stable prices.
I’ve scratched my head over their apparent urgency in this regard, and today’s jobs report.
The figure below shows a number of key variables in this debate. The straight line is the Fed’s estimate of the unemployment rate consistent with full employment—the rate at which price growth should stabilize around their target of 2% (their price gauge is the core PCE). The figure includes the actual unemployment rate, including today’s number, and also wage growth (wages and prices show year-over-year growth).
The strong expectation—really, the heart of the macro model driving the way economists think about all this—is that as the economy approaches full employment, prices and wages should accelerate. Thus, the Fed needs to tap the brakes to maintain its targets. In this regard, the straight line in the figure, the Fed’s estimate of the so-called “natural rate,” is like a sign on the highway saying: Slow down! Danger ahead!
But as the figure reveals it is a misleading sign, a poorly calibrated one. Prices and wages are not responding in the predicted manner so something fundamental is off about the model.
Surely, the Fed has to try to see around corners—they must be as much or more concerned with expectations as with actual outcomes. But there’s not much to see there either.
That said, they’re set on raising, and raise they will, probably either in their next meeting in September or December (and in this link I offer a rationale: perhaps they want to achieve a perch for the FFR before the next downturn). I don’t think a small bump up in rates will make a big difference to growth and jobs—certainly markets are expecting it.
But the key re future rate hikes is, if not “one and done,” than “one and look around patiently to see its impact.” If you must tap the brakes, I can’t stop you. But today’s jobs report shows a labor market that’s cruising along safely below the speed limit. Not everyone’s quite enjoying the ride yet, as the recovery has yet to boost the rate of wage growth. If next month’s report is a lot like this one, I’d at least wait until December for liftoff. Then I’d chill.