Strong Jobs Report Meets with Market Approval
So much for talk of a new recession. Friday's jobs report from the Bureau of Labor Statistics revealed strong growth in jobs in February, easing fears among some on Wall Street that the early 2016 market erosion could lead to recession.
Employers added 242,000 jobs in February, blowing past the Bloomberg estimate of 195,000 jobs. In addition, December's job total was increased by 9,000 jobs and January's estimate was raised by 21,000. Thus, monthly job growth averaged some 228,000 over the last three months — very close to the average monthly job growth in all of 2015.
In recent times, strong job reports have been received poorly by the markets on the assumption that they make the Federal Reserve more likely to raise interest rates. This time, the markets responded positively. The Dow Jones Industrial Average finished up almost 63 points for the day, while the S&P 500 rose by nearly 7 points and the NASDAQ by nearly 10 points. There are two likely reasons why: convincing evidence that the grim start to 2015 was not the beginning of a new recession, and the fact that wage growth (or more precisely, lack of it) may make the Fed wary of raising rates.
More Jobs but Lower Average Wages
Job growth has yet to increase wage pressures on a consistent basis. Wage pressures exist in the jobs with the highest demand, but the uneven nature of the recovery is reflected in the average hourly wage numbers. After a sharp 12-cent rise in January, average hourly wages dropped 3 cents in February to $25.35.
The unemployment rate stayed constant at 4.9%, but other employment numbers tell a deeper story. The U6 unemployment rate that includes "marginally attached workers and those working part-time for economic reasons" dropped to 9.7%, the lowest value since May of 2008. At the same time, the closely watched labor participation rate — the number of Americans aged 16 and over in the labor force — bounced back from a low of 62.4% in September to reach a more respectable 62.9% in February.
A total of 555,000 people entered the workforce in February. Over the past three months, 1.52 million have been added to the workforce while the unemployment rate has stayed low. There are enough people entering the workforce from the sidelines that in many areas of the economy, employers do not have to raise wages yet to find willing workers.
Many of the job increases in the BLS report came from the retail trade sector (55,000) and food service and drinking places sector (40,000), typically lower paying segments of the workforce — although healthcare and social assistance had the greatest gains at 57,000 jobs. Also, consider that the household survey showed that part-time jobs grew by 489,000, or over 7 times the number of full time jobs indicated in the same survey. It's the same refrain: in the aggregate, the economy is growing, but not all Americans see that growth reflected in their paychecks.
Partway Through a Long Journey
While this jobs report is undeniably strong, it reflects an economy that is still in transition from the depths of the Great Recession, which the Fed clearly recognizes as it struggles with monetary policy. The February numbers seem to confirm Fed Chairwoman Janet Yellen's belief that there is significant slack in the labor market to be absorbed before inflationary pressures become significant and broad-based.
For reference, let's look at pre-recession numbers. Through most of 2006 and 2007, the U-6 unemployment rate was between 8.0 and 8.4%, the labor force participation rate stayed close to 66%, and the average monthly job growth was around 135,000. Given the job losses in the Great Recession and new workforce entrants through population growth, it takes massive job growth to get back to pre-recessionary U-6 and labor force records. A record 72 straight months of job growth is great news, but the growth has been slow relative to the available workforce. However, with job growth spread over a longer time, inflation is held in check and the Fed has less reason to act.
The Fed seems to be willing to keep the interest rate hikes small and spread out to avoid applying the brakes to the economy, and the numbers so far seem to validate the size of the December rate hike. GDP for Q4 of 2015 is currently estimated at 1% and, for all of 2015, average GDP growth was under 1.9%. That is not an economy that needs much braking.
Job numbers are boosted by the current lack of productivity growth, as it takes more workers to do jobs when productivity is lower. Productivity has grown just 1.2% from 2007-2015 according to the BLS, which equals the rates from 1973-1979 and breaks strings of steadily rising productivity through the 1980's to 2006. Robust job growth and productivity can still go hand-in-hand when the economy is firing on all cylinders, but we are not there yet.
February's jobs report was a breath of fresh air that dismisses some of the Wall Street pessimism without igniting excessive fears of Fed interest rate hikes. We hope that the markets continue to keep things in perspective.
We weren't heading for a recession in January and February, and we probably aren’t heading for massive growth in April and May. As has been the case for months, we are slowly but surely digging ourselves out of the recessionary hole, and we at least appear to be nearing the edge. Stock market volatility makes that steady rise hard to see at times. We hope that you stayed on track with your investment plan and avoided panic selling in February; but if you did, learn from the experience.
What happens to the economy once we get back to pre-recessionary levels? There are too many variables to predict that far in advance. The world economy may change significantly in either direction by then. In either case, the Fed will be attempting to guide the economy back into a more normal balance of interest rates, job growth, and inflation, but the past few years have taught us that the Fed can only do so much without effective and unified government policy and actions. That is where you come in.
You have your chance to affect the economy indirectly by your choices in the upcoming election. We do not endorse any particular candidate, but as you go to the polls to vote for a Presidential candidate and your Congressional representatives, consider their economic views before you vote. Whatever your economic philosophy is, be sure to exercise your right to express it in November.