Last week began with a speech by Janet Yellen. The Fed Chair was not expected to say much of consequence, but instead, she continued to emphasize the large amount of slack in the labor market and the Fed’s strong commitment to reduce it. The clear implication is that short-term interest rates are not going up anytime soon. This message may have been meant to counter misconceptions taken away from her recent press conference. The March Employment Report remained consistent with the view that the labor market is improving, but we still have a very long way to go before we get back to normal conditions.
Private-sector payrolls have finally surpassed their previous peak, set just before the economy entered the Great Recession. That’s good news, but we would have expected to have added more than seven million new jobs over the last six years if not for the recession. Getting back to even isn’t enough. We’ve also lost more than 700,000 government jobs over this period (mostly in state and local government, but federal payrolls are 68,000 lower than when Obama took office). Nonfarm payrolls rose 1.7% over the 12 months ending in March, vs. growth in the working-age population of about 1.0%. Construction rose 2.6% (residential construction rose 7.9%). Manufacturing rose 0.6%, not much of a “renaissance.” Employment in wholesale and retail trade rose 2.1%. Finance rose 0.7%. Temp-help jumped 9.6%, which bodes well for future permanent job gains. Leisure and hospitality rose 2.9%. Healthcare rose 1.4%. Government fell 0.1% (federal -3.0%, state and local +0.3%).
The unemployment rate held steady at 6.7% in March, but was held up by an increase in labor force participation. Don’t read too much into that. It could simply reflect a rebound from poor weather. Seasonal adjustment is different across age groups and that can amplify weather effects (unemployment rates were lower in March for teenagers and those aged 25-54), but higher for young adults and the elderly).
The data for the key labor cohort, those aged 25-54 years, has shown a steeper rise in the employment/population ratio over the last several months. That’s good news, and improvement may broaden out to other sectors over the next several months. However, it still suggests a very large amount of slack in the job market. In turn, that slack is limiting upward pressure on wages and salaries, which means less fuel for consumer spending growth. This should eventually take care of itself. That is, wage growth will pick up as the labor market improves, but we have a long way to go. Consumer spending accounts for 70% of the GDP, which means that the pace of the economic recovery will be slower (than if wages were rising 3% to 4% year-over-year, vs. the current pace of around 2%).
Note that some of the “improvement” in the March data merely reflects a rebound from poor weather. However, an extended period of bad weather can have a longer-lasting impact on the economy (some sales are postponed, some are lost forever). In any case, much of the March economic data will be revised. So take it all with a grain of salt.
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