Just because the little engine that could is slowing down doesn't mean it can't anymore. It may mean that it's made it over the mountain and is pulling into its destination.
Which brings us to the latest jobs numbers. The economy only added 151,000 of them in January and actually lost 2,000 in revisions to previous months, but it was about the best below-expectations report you could get. The unemployment rate ticked down to 4.9 percent, which, if arbitrary round numbers are your thing, is the first time it's been below 5 percent since February 2008, for the good reason that more people were looking for and finding work rather than for the bad one that they were giving up. Indeed, the share of people with a job or looking for one hasn't fallen for four months now, and has actually risen in three of them. That's a big deal when we'd expect it to be shrinking from all the baby boomers hitting their golden years.
The recovery, in other words, is sucking people back into the workforce. It's not anywhere near as much or as soon as we wanted, but it's not nothing. And the reason for it is simple enough: Wages are finally rising, well, at least a little. Average hourly earnings were up 0.5 percent in January, and a slightly-less-tepid 2.5 percent the past year.
This is an economy that might, just might, be getting close to full employment. What does that mean? Just that unemployment is low enough that companies are having to fight over workers by offering higher pay — which, in turn, should mean that inflation will start increasing from its too-low 0.6 percent. Maybe an easier way to think about it is that we don't need to add as many jobs to keep unemployment from rising since there aren't as many people who want jobs but don't have them.
But even that, depending on your point of view, might be either too optimistic or too pessimistic. How could it be both? Well, it's too early to say whether the economy is really slowing down or not. There's nothing more dangerous than trying to read too much into a single data point. It's probably more likely than not that January's relatively low jobs number was just making up for the somewhat stronger ones at the end of the year, and that the trend remains the same. The economy, after all, has still added an average of 231,000 jobs a month for the past three, which, as you can see below, is right where it's been for the past four years.
If that's the case, then our-little-recovery-that-could still has a ways to go. We'd have been too optimistic about how far it's gone, and too pessimistic about how much further it could go. Think about it like this. If we say that the recovery is complete when it's not, we'll raise rates before we should and slow it down before it's reached everybody.
In fact, that's what markets are telling the Federal Reserve it did when it increased interest rates for the first time in almost a decade in December. And that's not just the stocks sell-off. It's investors saying that they don't think the economy will be strong enough for the Fed to raise rates at all this year, let alone the four times it wants to. Not only that, but they don't think the Fed will raise rates for most of next year either. It's too soon to know if the Fed's one rate hike has already hurt the economy, but we'll get a better idea if we see jobs growth start to slide down, and unemployment start to rise rather than stay steady.
In other words, we will find out whether the recovery is saying I think I can, I knew I could or I could if you'd just let me.