What’s the big news from the new jobs report?
The big news is that the jobs market apparently didn’t get the memo that the U.S. economy was barreling toward a recession. In fact, the jobs numbers came in a lot stronger than expected. Payrolls were up 312,000 in December, compared with expectations for about 180,000, and bringing the full count of jobs added for 2018 up to 2.6 million jobs, the strongest year for job gains since 2015. Wage growth accelerated slightly and, at 3.3 percent (before inflation) for mid-level workers, tied an earlier cyclical high. Weekly hours edged up slightly, jobs gains for the prior two months were revised up, and 70 percent of private industries added jobs on net, a high share for that metric.
But didn’t the unemployment rate go up? How is that good news?
Yes, unemployment ticked up from 3.7 to 3.9 percent, but its increase was mostly the result of more people coming into the labor market looking for work, a very good sign at this stage of the economic expansion. In fact, the share of the adult population either employed or looking for work ticked up two-tenths, to 63.1 percent, its highest level since early 2014. For reasons I’ll stress below, this serves as a critical reminder that the job market has more capacity to expand than many observers heretofore believed.
Does this mean that middle- and low-wage workers are finally getting a piece of the action?
It does. The figure below shows nominal wage growth for mid-wage workers, as this is a purer measure of the relationship between tighter job markets and wage trends (e.g., bringing inflation into the picture invokes globally set oil prices). As you see, in 2018, a year in which unemployment averaged less than 4 percent, the series accelerates from about 2.5 percent to north of 3 percent. Of course, what matters most is buying power, or real, inflation-adjusted wages. Here, the fact of lower oil prices is boosting paychecks. We don’t yet know inflation for December, by my guess is that real wages will be up 1.3 percent over the year. That may not sound like much, but it’s been a while coming, and for full-year workers, that’s almost $600 more bucks.
Great, but will it last?
This gets back to all the less-good economic news we’ve been processing. Last year was a clear bust for financial markets, which have been battered about by Trump’s trade war, slower growth abroad, lower (though still healthy) expected corporate earnings, and fiscal stimulus slated to fade later this year. In this sense, the will-it-last question is asking: Who’s right about the economy, the stock market or the job market?
My answer is that the job market is right in the near term, and it’s also the market that’s much more important to most middle- and low-income households, the vast majority of whom hold little or no stock. They depend on their paychecks, not their stock portfolios.
The stock market is forward-looking and is thus more reflective of the expected impact of the headwinds just noted, especially slower global growth. Note, for example, the huge sell-off earlier this week generated by Apple’s reporting of weak China sales. Moreover, stronger wage growth can squeeze profit margins, invoking the notion that what’s good for Main Street is often viewed as bad for Wall Street.
Putting it all together, I expect the strong job market to dominate the broader economy for the near term, say, for most of this year. The U.S. economy is 70 percent consumer spending, so low unemployment and decent real wage gains in the hands of acquisitive Americans should power things forward for the next few quarters, even while the stock market periodically freaks out in the background.
Speaking of freaking out, you seem to assume the Federal Reserve will be fine with this job surge. What if it slams on the growth brakes by raising interest rates to stave off inflationary pressures?
I don’t think it will do that, because inflation — both actual and expected — has been extremely well-behaved, even as the job market has gotten a lot hotter than the Fed expected. Think back to the rising unemployment point I made above, the one where unemployment rose mostly because of people entering the job market. Granted, this is one-month result that shouldn’t be overemphasized, but it’s part of a broader trend wherein the strong job market pulls more people in from the sidelines. The reason that’s so important to the Fed is that it means there’s more economic capacity — in this case, labor supply — than the Fed, or most other economists, thought. And, to its credit, the central bank under Chairman Jerome H. Powell has been stressing the importance of being data dependent. At this point, the data strongly point to the conclusion that slamming the growth brakes on the current economy would be a highly damaging policy mistake.
What do you think is the most important message to take from this report?
Simple: full employment is one of the best ways to help working families get ahead. Middle-wage American workers lack the union power they once had, and their bargaining clout has long been diminished. Very tight labor markets push the other way.
How tight is very tight?
This little figure packs some important information on that. It plots the unemployment rate against wage growth for mid-wage workers, 2014-18, and it reveals an essential “non-linearity.” As unemployment came down from 7 to 6 to 5 percent, not much happened on the wage front. But when the rate hits around 4 percent and lower, wages respond big-time. The key point is that if central bankers believe the “natural rate” of unemployment should be above 4.5 percent, they risk needlessly and recklessly consigning millions to stagnating living standards.