The Job Market and the Fed

The December Employment Report presented a mixed job market picture. The establishment survey data reflected strong job growth, but with a lackluster trend in average hourly earnings. The household survey showed a larger-than-expected drop in the unemployment rate, but that was due to a decline in labor force participation. What should Fed policymakers make of this report? Patience, grasshopper, patience ...

Next month, the Bureau of Labor Statistics will release annual benchmark revisions to the payroll survey data. That’s unlikely to alter the recent picture. In September, the BLS indicated that it expects that (based on payroll tax receipts) the March 2014 estimate of payrolls will be lifted by a mere 7,000 (or less than 0.05%). The BLS will also add two lines to the payroll table, the three-month average monthly gains for total and private-sector payrolls. This isn’t a hard calculation. Rather, the BLS will be emphasizing the trend in payroll growth over the monthly change. That’s a good thing. Investors pay way too much attention to the monthly figure, which is noisy and subject to revision. Payrolls averaged a 246,000 monthly gain in 4Q14. The average for private-sector payrolls was +238.000. This is over twice the rate of growth of the working-age population.

Nonfarm payrolls rose by 2.952 million in 2014, the strongest year since 1999. Private-sector payrolls rose by 2.861 million, the best since 1997. The ADP payroll estimate suggests that job gains are being led by small firms, with good strength in medium-size hiring as well. This is what one should naturally expect to see as the economy gathers steam.

The household survey data painted a somewhat different picture. The unemployment rate fell to 5.6% (a level which was once considered to reflect “full employment”). However, the decline was due to a drop in labor force participation. The employment/population ratio, the preferred measure of labor utilization, held steady – up just 0.4 percentage point from a year ago. That suggests that while labor market slack is being taken up, the improvement is very gradual. Progress is more apparent for the key age cohort (those aged 25 to 54), but the ratio remains well below the pre-recession level (which was well short of the peak in the late 1990s).

A month ago, average hourly earnings were reported to have risen 0.4% in November, which led some to declare that more rapid wage growth had finally arrived. Whoops. Average hourly earnings fell 0.2% in December, while the November figure was revised down to +0.2%. Luckily, a drop in the Consumer Price Index will boost real earnings for December. However, the lackluster growth in hourly earnings is one more sign of slack.

Minutes of the December 16-17 Fed policy meeting noted that officials could begin raising short-term interest rates even if inflation remains low (as long as it’s expected to move to the Fed’s 2% goal) and policy will remain very accommodative for a long time after the initial rate hike. At some point, the Fed will simply have to take its foot of the gas. Nevertheless, the risks surrounding the timing of tightening aren’t symmetric.

© Raymond James

© Raymond James

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