For the past eight years, there hasn’t been a safer bet than that job growth will be good but wage growth won’t. Right on cue, that was once again the case in July.
The economy just added jobs for a record 94th straight month, and wages grew less than 3 percent for what was also a record 110th straight month. Now, that’s not to say everything has always gone exactly as expected, but rather that whatever surprises there have been have tended to occur within a very narrow band. This time, you see, the slightly disappointing 157,000 jobs we added were largely offset by the 59,000 additional jobs that data revisions showed we’d created on top of what was previously thought in May and June. The result is that, in the last three months, the economy has created 224,000 jobs a month, very healthy for this point of the business cycle. It was enough to send the unemployment rate down from 4 to 3.9 percent completely for the good reason that more people were both looking for and finding work.
The good news here is there’s no question job growth has picked up a little from last year. Specifically, we’ve added an average of 215,000 jobs per month so far in 2018 compared with 182,000 per month in 2017. But the bad news is there’s little reason to expect this to continue much longer. That’s because it’s happening for the entirely predictable reason that the Trump administration has pushed $2 trillion of stimulus into the economy — stimulus that’s going to fade away soon. Which is to say that this burst of job creation is only that: a burst. Even then, as you can see below, it’s only gotten us back to where we were in 2012. We’ve still added far fewer jobs the last 12 months than we did at the recovery’s fastest point in 2015.
In a lot of ways, though, this question about how fast the recovery is going is less important than how far it can go. The answer is that we have no idea. Economists used to think joblessness couldn’t get much below 5 or 6 percent — what they called the “natural rate of unemployment” — before inflation started to rise. The idea was that lower unemployment would give workers the bargaining power to demand higher wages and that higher wages would eat into corporate profits enough that they had to respond with higher prices. But that hasn’t happened at all so far. Consider this: Unemployment has fallen from 4.9 to 3.9 percent in the past two years, but wage growth has actually ticked down from 2.8 to 2.7 percent during that time. That tells us that unemployment must be able to go a lot lower than we thought it could, maybe even 3.5 percent or lower, before inflationary pressures really emerge. So does the fact there is still a smaller percentage of 25- to 54-year-olds, who should for the most part be too old to still be in school but too young to be retired, working today than there was in 2007.
The unemployment rate, in other words, still might be overstating how strong the labor market is.
That’s why the Federal Reserve has been able to afford to raise rates at such a leisurely pace, and, more importantly, why it has been right to. If it had listened to its critics who thought we were at “full employment” back in 2015 and hiked rates much more aggressively than it has, then joblessness would be a good bit higher than it is today for no reason at all.
So what’s made our recovery so frustrating — how slow and steady it’s been — is also what’s helping to make it so long-lasting. The Fed hasn’t had to worry about inadvertently quashing it by raising rates too fast, because the Fed hasn’t had to raise rates quickly at all. It can just keep going and going and going, and, well, I’m not sure how many more “goings” we need here, but that’s the point. All we can do is see how long this lasts by allowing it to.
Discretion can be the better part of monetary policy.