In the year that the U.S. economy was supposed to take off, an odd thing has happened: Americans are finding new jobs, but they aren’t finding employers willing to dole out meaningful pay increases.
It’s the tension at the center of an economy that is only growing more perplexing as it enters a perilous autumn.
Fresh data released Friday — showing unemployment at a seven-year low and a cooling pace of jobs growth — provided conflicting signals about the nation’s economic momentum as the Federal Reserve considers raising interest rates for the first time in nearly a decade. The U.S. added 173,000 jobs, slightly below expectations, while the unemployment rate fell to 5.1 percent. Never before has the nation’s unemployment rate plunged so low — a point when companies should be competing aggressively for workers — while wages have stayed so flat.
The Department of Labor’s latest data had been eagerly anticipated by investors and policymakers as a crucial gauge of whether the economy is ready to close the doors on a remarkable era of dirt-cheap borrowing. But rather than clarifying the Fed’s decision, the August jobs data merely underscores why the debate is so fraught.
The uneven growth at home, coupled with a jittery stock market, has opened up a new period of uncertainty about whether the U.S. economy can handle a rate increase on top of mounting global turmoil.
Major U.S. stock indexes fell between 1 and 1.7 percent in the aftermath of Friday’s jobs numbers, as investors wagered that the report could give hawkish Fed members the impetus to call for a small rate hike in two weeks.
By at least one measure, the economy is soaring. Over the past 40 years, unemployment has almost never been as low as it is today, with the exception of a few years in the late 1990s. But in this case, wages for non-management workers are rising only half as quickly as they did throughout much of the 1980s and 1990s.
“By all accounts, we should be at the precipice of better wage growth,” said Mark Luschini, chief investment strategist for Janney Montgomery Scott. “But that has been the conundrum: When will we get there?”
Though jobs growth last month was below the 212,000-per-month pace of the year, payroll figures for June and July were revised upward by a combined 44,000 positions. In August, the unemployment rate fell mostly because more found jobs, but also because a small number gave up looking for work. The average hourly wage rose by a decent eight cents from July — to $25.09 — but the year-over-year but the year-over-year growth rate has been at a crawl since the financial crisis.
At minimum, workers are seeing new buying power because prices across the nation have been slow to rise. Consumer prices have held steady this year, in large part because of falling commodity prices, particularly oil. But even with food and energy removed from the equation, prices have risen only 1.2 percent over the last year. That is shy of the Fed’s 2 percent target, normally associated with a sound economy.
Job growth and inflation are linked, economists say, because as more people get jobs — and see raises — broader prices will also go up. Within the next few months, cheaper oil prices will also cease to influence inflation in a year-over-year comparison.
“At some point, as the labor market tightens, it will provide upward pressure” on wages and cause inflation, Jon Faust, an economics professor at Johns Hopkins University, said Thursday at a panel discussion at the Brookings Institution. “So that’s where the debate is: Are we close to that point?”
Still, the prospect of wage increases is particularly important for the Federal Reserve, which has a mandate to push for full employment, a point normally identified by a low unemployment rate and an uptick in worker incomes. In this case, the U.S. economy has one without the other.
Policymakers remain sharply divided about why this is happening. Some say a wage spike is just around the corner. Others say salaries are pushed down by fundamental changes in the way companies treat workers, or by a decline in union membership, or by the swell of a “shadow” workforce that is not currently looking for jobs but could yet be enticed.
“I would challenge you on the notion of full employment,” said Deputy Secretary of Labor Christopher Lu said in a phone interview. “There are 6.5 million people who are working part-time and want to work full-time. I would say — and they would say — that we’re not at full employment right now.”
The central bank will meet in the middle of September, and it has long signaled that it is looking for the right time to nudge up borrowing costs for banks — and, in turn, for homebuyers and borrowers. That move would put the economy on more normal footing following nearly seven years of near-zero interest rates.
“The latest jobs data will leave everyone maintaining their position on the Fed,” Steven Ricchiuto, chief economist at Mizuho Securities USA, said in an e-mail. “Not the decisive data the Street wanted.”
Only weeks ago most investors figured the Fed would make the move in September, but market volatility over the last month and evidence of a slowdown in China has thrown that plan into doubt. Since the beginning of August, the Dow Jones Industrial Average has fallen more than nine percent, while enduring two of its steepest daily drops since the financial crisis.
Though the U.S. has only modest direct exposure to China — trade with Beijing accounts for less than 1 percent of the U.S.’s GDP — a sudden deceleration in the world’s second-largest economy would cause broader ripples, potentially leading to trouble in other emerging economies while further pushing down prices of oil and other commodities.
In a speech Friday morning, Richmond Fed President Jeffrey Lacker argued that the economy is strong enough to withstand a small rate increase by the Fed. He pointed to strong gains in consumer spending and the rapid decline in unemployment over the past two years. Meanwhile, he said, inflation measured from January to July has reached the central bank’s target of 2 percent.
“Waiting too long to begin raising rates could require a more dramatic increase in rates to restrain inflation pressures once they have become apparent in the data,” he said.
But others at the central bank believe there is no need to rush to action. Annual readings of inflation still remain below the Fed’s target, and wage growth has stagnated for years, both signs that the recovery has room to run. Meanwhile, renewed fears of a global economic slowdown — and the accompanying turmoil in financial markets — are raising questions about the outlook at home.
“Indications of a much weaker global economy would at least increase the uncertainty surrounding policymakers’ economic growth and inflation forecasts,” Boston Fed President Eric Rosengren said this week.
In August, nearly one-third of the jobs growth was driven by the health care sector, one of the most reliable industries during the long recovery from the financial crisis. But the manufacturing sector shed 17,000 jobs, the worst monthly total in two years. The mining industry also cut another 9,000 jobs while reeling from oil prices that are down 50 percent from a year ago. Mining employment has declined by 81,000 during that span.
Some analysts have pointed out that, because of a seasonal quirk, initial government data tends to underestimate jobs growth in August. Goldman Sachs says that over the last five years initial August estimates have been revised by an average of 79,000 jobs.