Over the full year of 2015, U.S. employers added a net 2.7 million jobs. That’s not as many as 2014’s addition of 3.1 million, but other than that, 2015 was the strongest year of job growth since 1999. Even wage growth is maybe showing some signs of life, suggesting the tighter job market is finally generating a bit of competition for workers, a point I’ll get into below.
There are, of course, some clouds in the economic sky, including the still-elevated underemployment rate and the historically low rate of working-age people in the labor force, though some of the latter is due to retiring boomers. But the U.S. job market is unquestionably on a roll and has been for some time. We’re not at full employment yet, but if this keeps up, and I can’t stress how important it is that it does, we will get there, perhaps by the end of this year.
There’s market turmoil across the globe. Earlier in the week, some were finding recessionary hints in the data flow. And while I don’t exactly have my thumb on the pulse of public opinion, it’s probably fair to say that a lot people ain’t exactly feelin’ it when it comes to a great job market recovery.
So what gives? I actually think these questions can be at least provisionally answered.
As far as the rest of the world is concerned, the big story has been China, which makes sense, given that it’s the second largest economy after ours, and their growth rate has slowed by half, as best I can tell, from about 10 percent to 5 percent per year. They’re still figuring out how to run a stock market — it doesn’t exactly come naturally to communists — and, smartly I’d argue, they’re trying to move from an excessively credit-driven, export-oriented model to one based more on internal consumption and measured (i.e., less bubbly) growth.
Okay, but what does that have to do with us? In fact, only about 8 percent of our exports go to China, so unlike countries like Brazil and some African nations that export a lot of commodities to China, we’re not likely to feel a slowing China through an export channel.
On the import side, however, we’re vulnerable. About 20 percent of our goods imports are from China, and we already run large trade deficits with them, amounting to around 1.5 percent of GDP, or more than $300 billion/year. Their slowing growth and market disruptions are helping to depreciate their currency, the yuan, and this could exacerbate the trade gap, and in doing so, darken further one of the dark clouds I haven’t mentioned: the sharp slowing of manufacturing employment as our goods exports become less price competitive. American factories added only 30,000 jobs for the whole of 2015, compared with 215,000 in 2014.
What about global capital flows? Could they bite us? It’s often hard to gauge the extent of inter-connectedness in financial markets, so I wouldn’t rule it out, but for now, I’m more concerned about how China’s woes play out through the trade channel than through the finance channel.
Next, if the job market is so damn great, why don’t people feel better about it?
Well, here we are six-and-a-half years into an economic expansion that began in the second half of 2009, and we’re still not at full employment. And given that we’re not at full employment yet, the benefits of growth have been narrowly shared. Moreover, profits recovered way before wages in this expansion, and I don’t blame people for feeling a bit prickly about the fact that the sector that brought us the Great Recession — high finance — is the sector that recovered first. You saw “The Big Short,” right?
The figure above shows average hourly wage growth, both real and nominal, for the past few years. For the vast majority of the expansion, nominal wage growth didn’t budge; it was locked in at 2 percent. So people maybe read about the recovery, maybe heard the Federal Reserve going on about it, but at least in terms of their nominal paychecks, they didn’t see much.
More recently, with inflation freakishly low, nominal gains have become real gains, and in 2015, there’s finally a bit of an acceleration. So that’s good.
But remember, the wage series we’re talking about here is the average, and when inequality is upon the land, the average is less representative of what’s happening to low-wage workers. Other BLS data show that the real weekly earnings of low-wage workers (25th percentile) are down 3 percent from 2009.
So that’s one reason people are economically miffed, even as things clearly improve. For the recovery to reach them in earnest, it will need to continue for a good while longer. It’s not just getting to full employment that enforces a more equitable distribution of growth. It’s staying there.
That means, barring a big upside surprise to inflation, something I’d argue is a low-probability event, the Fed needs to keep their feet to themselves, i.e., off the brakes. It’s a solid expansion, but threats exist. For now, love it, and leave it alone and eventually, it will reach the people.