On the first Friday of each month, the Bureau of Labor Statistics (BLS) releases a report entitled “The Employment Situation”, which offers details regarding the health of the U.S. labor market. The report is greatly anticipated for its headline “nonfarm payroll employment” figure, however, it also includes the unemployment rate, labor force participation rate, as well as many other labor metrics broken-down by demographic and industry. Traders, economists, and all else interested in the future path of interest rates are among those who regularly view “The Employment Situation.” This post will address how the markets received the most recent report, and what it revealed about the state of the U.S. labor market, and how this relates to the economy.
The headline number for March came in at 98,000 jobs added, which fell short of economists expectations of 180,000. This lackluster number came after nonfarm payroll growth of 227,000 and 235,000, in January and February, respectively. The initial shock of the headline miss caused the dollar to drop – fitting with the rationale that the weaker than expected jobs report implies a softer than expected U.S. economy, lowering probability of the Fed raising rates. However, once traders read further, they realized a seemingly stronger, albeit ambiguous, jobs report than initially realized and the dollar rebounded. U.S. rates were also higher by the end of the day, as many analysts wrote off the soft headline number to seasonality and weather. The Unemployment rate declined by .2 percentage points, to 4.5% in March, while the Labor Force Participation rate remained at 63%. Lastly, the year-over-year average hourly earnings grew at 2.7%, consistent with expectations.
Now, let’s unpack the data to determine where the labor market is at in the cycle. To frame our conversation, nearly all of the Federal Reserve’s Open Market Committee participants “judged that the U.S. economy was operating at or near maximum employment” as of their March meeting, so this discussion may be splitting hairs. First, an argument for persistent slack in the labor market. The average employment growth clip in 2017 is 177,000 jobs; a rate that high reveals a loose labor market, as the demand for labor is consistently robust. The nonfarm payroll growth rates for April and May should facilitate a clearer trend for 2017 and the Trump Administration. If those reports reveal robust growth around the 180,000 mark, Fed officials at their June meeting may second-guess their stance on the labor market.
A confounding piece of evidence of slack in the labor market is the stubbornly low labor force participation rate, which was measured at 63% in March. The labor force participate rate is only 0.6% better than 2015’s low, which is the lowest value in decades. A low participation rate may skew the results of the posted unemployment rate (U-3), as that figure doesn’t include those workers who are discouraged from seeking employment, but would take a job if presented with the opportunity. A primary reason for a suppressed labor force participation rate is the structural change that has taken place in American industry that has gradually shifted the desired employee skillset, permanently excluding some Americans from appropriate employment. Little growth in this metric, combined with the fact it’s at multi-decade lows, could suggest that U.S. employers have a ways to go to satiate the labor market, or it could imply that the labor market has found a “new normal” in terms of participation (at least until the labor force’s skills base shifts to better match demand).
A stronger argument can be made that the latter is the case. U6 – defined as total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force – is often used as a broader measure of unemployment. The March 2017 BLS report revealed that U6 fell to 8.9%, its lowest level since the Financial Crisis. This declining measurement suggests that the labor market is nearing full employment. Complementing this trend is the U6 – U3 spread, which was also the tightest seen since pre-crisis.
Wages met expectations and grew at a clip of 2.7%, higher than experienced at the beginning of the recovery. This suggests that employers are experiencing more competition for labor and are forced to raise wages to remain competitive. Some analysts would still like to see wage growth eclipse 3.0% – especially to offset higher inflation – before they’re assured we’ve approached full employment. Beauty is definitely in the eye of the beholder.
Overall, a softer jobs report in March has left the Fed and investors in “wait-and-see” mode until this Friday, when the April report is revealed. This report will tell whether March’s data was a blip on the radar, or the beginning of a new trend of weaker data. Regardless, the next two jobs reports figure to weigh heavily in the Fed’s rate hiking plan (currently expected to resume in June).