February Jobs Beat Estimates
The February jobs report from the Bureau of Labor Statistics (BLS) indicated continued strong economic improvement, with 295,000 jobs added in February. January’s job gains were revised down by 18,000 jobs, but the strong December 2014 numbers were left unchanged at 329,000. If the first two-month’s average can be maintained, that equates to over 3 million new jobs created throughout 2015.
Several days earlier, the payroll processor ADP reported a 212,000 February gain in jobs, slightly below ADP’s projections, so the BLS jobs report comes as a pleasant surprise. Of course, on Wall Street — where good jobs news currently equals bad news — stocks dropped over concern the Fed will be forced to raise interest rates.
Wall Street mind games aside, unemployment news was also relatively bright. The unemployment rate dropped from 5.7% to 5.5%, the lowest rate since May 2008, and the more comprehensive U-6 unemployment rate fell from 11.3% to 11.0%. However, February’s labor force participation rate was 62.8%, still stuck in the 62.7-63.0% range, as it has been since September 2013.
Wages Show Limited Growth
The 12-cent per hour wage growth in January appears to be more of an aberration than a trend. February’s wage growth fell to two cents per hour, averaging out the January numbers to portend a decent but stubbornly slow growth in wages.
Part of the reason for poorer wage improvement may be the type of jobs created. January’s job growth was relatively broad, but February’s was more concentrated in lower-paying sectors. The food/drink service sector led the way this month with 59,000 jobs created while retail trade gained 32,000 jobs. While this is partially offset by a 51,000 increase in professional and business services, higher-paying jobs such as manufacturing and financial activities showed little growth, and the mining sector lost 7,000 jobs.
Moody’s Analytics Chief Economist Mark Zandi supplied another possible reason for the persistently slow wage growth. Zandi suggested that the current wage growth is biased downward because of the increasing number of highly paid boomers leaving the workforce and being replaced by younger (and therefore cheaper) replacements. This may be true, but it does not seem to explain the overall current relationship between wages and job growth.
A New Normal of Long-Term Unemployed?
It is fair to ask if we are entering a new period of acceptable unemployment rates and wage pressures. Carl Tannenbaum, Chief Economist with Northern Trust, observed, “the unemployment rate now is at a level that when I went to school was considered full employment,” but wages are not seeing the requisite upward pressure.
We aren’t suggesting that the basic laws of economics have changed, but perhaps some of the underlying inflection points have. If the U-6 unemployment rate remains high as a labor pool to draw from and the job skills match up reasonably well to typical job requirements, wage pressures are likely to stay low for a much longer time than traditional economics would indicate. It will take a lot more jobs to bring the U-6 rate down to the pre-recession levels of around 8.5%.
Meanwhile, wage growth will be under a greater microscope in the next few months as analysts look for evidence that the trend of higher minimum wages becomes reflected in the wage growth profiles. By definition, this almost has to keep wages increasing — especially since Wal-Mart joined the ranks of those raising minimum wages — but will it have the “pump-priming” effect that some economists expect? The greater concern is with higher-paying jobs, and it is not obvious yet what sector is going to create them.
Once again, an overall positive job report with mixed messages seems to be reinforcing everyone’s already-held opinion on Fed rates and the economy in general. If you think the continued momentum of job creation is a sign that economic growth is increasing, you think the Fed must raise interest rates soon. If you think stubbornly low wages will continue dragging down the economy, you think the Fed must keep interest rates low.
Wall Street seems to think the former, as all three major stock indices fell significantly right after the BLS report. (As with the previous reports, the corresponding stock rebound should be relatively quick.) We tend to think the latter, but that an interest rate rise is inevitable even if U-6 unemployment remains relatively high and wage growth is relatively low.
In lieu of definable Fed criteria for raising interest rates, monthly job reports are likely to continue to produce the same reactions until the Fed acts. At some point, one would think the inevitability of higher interest rates would stop this overreaction and Wall Street will focus more on fundamentals —but that point appears to still be months away.
Other factors such as GDP growth indicate that the economy is indeed growing, but doing so more slowly than many would like. Given the weak global economy, we should probably keep our current growth rate in perspective and maintain our collective stock positions. Unless you want to play the game of predicting the jobs report and “timing” the response, our stock advice dates back to World War II Britain: “Keep Calm and Carry On.”