Solid Jobs Report Justifies Powell’s Case

The government reported that the economy added a better than expected 263,000 jobs in April (estimated range was 175,000 – 200,000). It was the 103rd straight month of job growth, the longest streak on record. Nearly ten years into the expansion, it is notable that average monthly job creation is 205,000 for the first four months of 2019, just above the monthly amount added since the labor market bottomed out in 2010.

April also saw a new milestone for the unemployment rate, 3.6 percent, the lowest of the expansion, and more impressively, in 49 years. (In December 1969, unemployment cratered to 3.5 percent, amid the Vietnam War.) However, in April the slide occurred due to a combination of some more workers getting jobs AND a drop of nearly a half-million workers leaving the labor force. The broad measure of unemployment (“U-6”), which includes unemployed, discouraged and marginally attached workers, and those who are working part-time, but seek full time, remained at 7.3 percent, matching its lowest point since December 2000.

After starting the year with larger paychecks, wage gains have hit a springtime plateau. Average hourly earnings increased by 3.2 percent in April from a year ago, matching the March pace. Despite complaining about labor shortages (the NFIB survey found that 39 percent of small business owners have job openings that are hard to fill, the highest proportion in the survey’s 44-year history), companies have not tried to entice new workers by raising compensation significantly across the board.

The pay issue confounds economists, because in similar tight labor markets of the past, when the unemployment rate was below 5 percent (1960s and 1990s), wages increased by 4 to 5 percent annually. Since December 2015, the unemployment rate began drifting under 5 percent and even with continued decreases, hourly pay for non-supervisors has increased by 2.4 percent (adjusting for inflation).

The Labor Department released another report earlier in the week that may explain some of the wage deficiency. Worker productivity jumped in the first quarter of the year and pushed the annual increase to the highest level since 2010. Higher productivity has historically allowed the economy to grow faster without triggering inflation. However, the report also showed that wages increased just moderately, which led economist Joel Naroff to note: “So much for the theory that rising productivity leads to improved wage gains…businesses are managing to pass through only part of the productivity increases to workers.”

The overall strength of the labor market, along with the bounce in productivity, helped make the case for Federal Reserve Chairman Jerome Powell’s decision to hold interest rates steady at last week’s Fed Meeting. President Trump, Vice President Pence and White House National Economic Council Director Lawrence Kudlow continue to call on the central bank to lower interest rates, but Naroff notes “With job growth strong and the unemployment rate barely measurable, it is hard to see why the Fed would even consider lowering rates…indeed, this report argues more for a continuation of the [Federal Reserve] normalization process than a reversal of it.”  

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