As the uneven US economic recovery continues, a classic dynamic has come into play: Optimists point to healthy job-market numbers as evidence that we’re on the right track, while pessimists highlight the labor market’s flaws as proof that we’re far from normal.
Clearly, last week’s employment numbers showed a significant improvement in April, with the US economy adding 288,000 jobs and the unemployment rate dropping to 6.3%. Two factors substantially beat expectations: non-farm payrolls and the unemployment rate, which is now at its lowest level since 2008.
Given an unemployment rate that is nearing its historical average, the report caused some investors to conclude that an increasingly solid labor recovery is underway and that we are at, or near, a normalized job environment. Yet other investors have a far different interpretation of the overall data.
“Chair Yellen and most FOMC members believe significant slack remains in the labor market, and there’s plenty of evidence to back up their conclusions.”
3 Causes for Concern about Jobs
Federal Reserve Chair Janet Yellen and most FOMC members believe significant slack remains in the labor market, and there’s plenty of evidence to back up their conclusions.
1. Wage growth is very low. Topping the Fed’s list of jobs worries is a surplus of workers who are unable to command any substantial wage increases. The Employment Cost Index for the first quarter, which was released last week, showed anemic growth in wages and salaries.
2. The number of long-term unemployed is far from normal. Those jobless 27 weeks or more constitute more than 35% of job-seekers—much more than the 20% seen on average at this stage of a cyclical expansion.
3. The labor force participation rate is near historical lows. This may be benign, since demographics clearly play a role in the reduced size of the labor force as Baby Boomers continue retiring. Yet it also may be cause for concern: A sizeable portion of the labor force has exhausted its eligibility for unemployment benefits and may conclude that a job search is hopeless.
The Spring Fever Factor
With legitimate “glass-half-full, glass-half-empty” arguments on both sides, the big question is whether the recent job-creation data improvement is temporary—just a rebound from the winter’s awful weather—or evidence of something more sustainable. Two recent data points highlight the need for additional monitoring:
| • | Initial jobless claims clocked in at 344,000 for the week ended April 26, higher than consensus expectations and the previous week’s reading. |
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| • | Continuing claims also rose by 97,000, to 2.771 million, for the week ended April 19, though more data are needed before we can make any kind of conclusive determination. |
Why the Fed Dispensed with the Goalposts
The abundance of mixed signals makes one thing clear: This is not a job environment that is reverting to a mean. If it were, the Fed wouldn’t have dispensed with the unemployment rate as a metric for deciding when to raise the Fed funds rate.
In reality, there are good reasons why the Fed didn’t just move the goalposts with employment—it changed them completely. The US central bank recognizes the need to look more holistically at the employment situation and the overall economy—and conclude with conviction that the economy can sustain growth on its own—before it can begin a long-awaited course of tightening.
The Fed knows that the bigger picture always tells a truer tale, and this one reveals a very uneven and still spotty expansion—one that we believe continues to need substantial accommodation from policymakers.
Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors.She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
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