This week’s riddle: when is a higher unemployment rate good news for the economy? When it is accompanied by an overall increase in jobs, a higher labor participation rate, and rising wages. All of these things came to pass in the latest jobs report released by the Bureau of Labor Statistics (BLS) on Friday.
The BLS report said that 257,000 new jobs were created in January 2015, and 147,000 more jobs were added through revisions in the November and December numbers. That pushes the total of new jobs added over the last three months above one million – the best three-month stretch in over 17 years. However, over 700,000 workers entered the workforce, absorbing those new jobs and leading to a slight uptick in the unemployment rate to 5.7%.
The labor participation rate rose 0.2% from 62.7% to 62.9% – a good sign, but still within the persistent fluctuation between 62.7% and 63.0% that dates back to October 2013. Another good sign is that the job growth was again spread relatively evenly with gains in both lower and higher wage industries. The one major private sector exception should be no surprise – oil and gas extraction industries are dealing with layoffs.
One of the most promising aspects of the report is an increase in wages, considered by some a sign that the recovery is in full swing. Average hourly earnings (non-farm) showed a healthy 12-cent increase in January to $24.75, blowing past a 5-cent decline in December.
It remains to be seen whether those increases can be sustained as we test the balance between continued wage pressures from job creation and release of those pressures from more people re-entering the workforce. If there really is a “skills gap” between the types of jobs created and the skill set of the long-term unemployed, wage increases should continue as competition increases for new (and existing) jobs.
Over the last few years, monthly wage increases have tended to be negated over the succeeding month or two. There may be another fluctuation left in 2015, but at least signs are promising this time that wages may keep an upward trajectory. Consumer spending has been on a general upswing, and low gas prices and the absence of inflation are among the factors that should prod consumer momentum further forward in the short term and keep demand high.
If you must look for the half-empty glass, consider that the dollar is quite strong and overseas economies are weak, thus exports are challenged in the short term. GDP growth settled into a lower (but more solid) upward trajectory – and in historical perspective, the wage growth is still quite small and the total (U-6 unemployment rate) is still quite high.
It is but one step in a long journey – but right now, we will happily take two steps forward without one step back.
So what do analysts make of this report? The general consensus is that the report is good; there is a bit less consensus on just how good it is.
Several analysts suggest good times ahead for the jobs market, with Guy Berger of RBS calling this report “the best employment report we’ve had in a long time” and concluding that “the labor market is in really good shape as we head into 2015.” Ian Shepherdson of Pantheon Macroeconomics adds, “employment growth is astonishingly strong.”
Prognosticators who are more cautious include Gus Faucher of PNC Financial Services, who said, “I do want to wait a few more months to say definitively, ‘This is it.’” We agree with this approach.
This is undoubtedly a promising jobs forecast. The key word is “a”. It is one report. While it is heading in the right direction, we argue that it would take two to three similar reports to truly declare victory. Speculation that this report may nudge the Federal Reserve toward higher interest rates without any significant evidence of inflation seems overblown – the Fed is far more deliberate.
In this jobs report, almost everything seems to be moving in the right direction in a synchronized and reasonable fashion. Jobs continue to be created at a fairly steady pace, and are finally starting to draw in more of the long-term unemployed back to the workforce. There are signs of wage growth and inflationary pressures have not come to pass (and when they do, the Fed is standing at the ready).
Enjoy the good news, but do not overreact to it. Slow and steady economic growth still seems likely, and that should continue to keep stocks rising over the long haul. This time, your wages may rise along with them.
If you are fortunate enough to get a raise, feel free to celebrate modestly – and then sink that extra money into whatever investment best suits your needs. We suggest extra IRA or 401(k) contributions over buying extra coffee each week (or perhaps a Porsche)…but, in the end, it is your money.