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The US jobs recovery: a longer term view

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Friday's jobs report was a blockbuster: Job growth regained momentum after a recent slow patch, and the unemployment rate fell to a nearly two-decade low.

[NEW YORK] Friday's jobs report was a blockbuster: Job growth regained momentum after a recent slow patch, and the unemployment rate fell to a nearly two-decade low.

The Labor Department reported an increase of 223,000 jobs in May, reflecting healthy gains in a broad range of industries. And with unemployment at 3.8 per cent, a level not seen since the heady days of the dot-com boom, the progress is increasingly reaching groups that often face discrimination or other disadvantages in the job market.

Unemployment among African-Americans hit its lowest level on record in May. The jobless rates for Hispanics, teenagers and those with less than a high school education are likewise at or near multidecade lows.

Among women in the labor force, unemployment was at its lowest in more than 60 years.

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Larry Kudlow, one of President Donald Trump's top economic advisers, said solid job growth and rising wages pointed to a strong economy.

"This is a prosperity era," Mr Kudlow told CNBC. "I believe we've entered into the largest, longest prosperity in a couple of decades."

Most economists expect the momentum to continue. But it is worth taking a step back and putting the latest numbers in some longer-run context.

The true story of the recovery is one of remarkable consistency. American employers have added jobs for 92 straight months — far and away the longest streak on record — and apart from a few brief slowdowns, the gains have been steady.

Since the recession and its aftermath, which reduced the nation's payrolls by nearly 8.7 million, the economy has gained 18.9 million jobs — a powerful rebound that belied fears of a "jobless recovery". (Overall growth was needed just to keep pace with the working-age population, which has increased by about 10 million during the same period.)

Hiring accelerated early in the recovery, peaking in early 2015 at a pace of more than 3 million jobs per year. Growth gradually tapered after that, which is not surprising — most economists expected the rate of job creation to keep falling as companies recovered from the downturn and the pool of available workers dried up.

More recently, though, job growth has experienced an unexpected uptick. Employers have added an average of 207,000 jobs per month so far in 2018, up from 172,000 in the same five months a year ago.

It's too soon to say whether that acceleration is the start of a new trend or just a blip. But many economists expect the faster pace of growth to continue because of the tax cuts passed in December and the extra government spending approved by Congress in January. A string of other data points, like personal income and spending, have also shown signs of renewed strength. How that plays out in the longer term could help Mr Trump and Republicans with midterm elections ahead.

Federal Reserve policymakers are watching the indicators closely as they continue to shift from fostering a recovery to guarding against an overheated economy. They seem almost certain to raise interest rates when they meet this month, with at least one additional increase likely in the second half of the year.

With a 2.7 per cent year-over-year increase in average hourly earnings, gains are healthy enough to head off fears that wages are stagnating. A deeper drop in the unemployment rate or a big bump in average hourly earnings would stoke fears of inflation and, in turn, a more hawkish Fed.

"It was a stronger report than expected, but it wasn't so hot as to lead the Fed to believe it's behind the curve," said Michael Gapen, chief US economist at Barclays, adding that the Fed's plans shouldn't worry stock-market bulls.

"It will keep the Fed on its gradual normalisation path."

Mr Gapen believes the unemployment rate could sink as low as 3 per cent by the end of 2019. That would bring it to levels last seen in 1953, the height of the economic boom after World War II.

The unemployment rate does not tell the full story, however. For one thing, May's report showed a slight drop in the share of Americans who are either working or looking for a job. That, in turn, put downward pressure on the unemployment rate, which sank from 3.9 per cent in April.

Government statistics count people as unemployed only if they are looking for work, a definition that excludes people who are voluntarily or involuntarily out of the labour force entirely. During the recession and recovery, that distinction was crucial: The official unemployment rate ignored millions of people who had abandoned their job searches as hopeless.

Eight years of job growth, however, have shrunk the pool of "discouraged" workers, and broader definitions of unemployment all show strong progress.

But while the labour market today is healthy, there are signs it still is not booming the way it was in 1999 and 2000. The employment rate — the share of adults who have jobs, a measure that avoids tricky questions about who should count as unemployed — still has not returned to its pre-recession level. That is largely because of the retirement of the baby boom generation. But even adjusted for the aging workforce, the employment rate is below its peak in 2000.

Then there is the mystery that has loomed over the job market in recent years: lacklustre wage growth. With unemployment low, companies are increasingly complaining about a shortage of qualified labour. Yet that has not translated into fat raises for workers.

The year-over-year gain in wages in May outpaced inflation, and while noisy and sometimes conflicting data make it hard to discern a clear trend, there are signs that the growth is accelerating, especially for lower earners.

Still, many economists think wages should be rising faster given the tight labour market. Economists are divided over what explains the disconnect, with some seeing evidence of a long-term, structural shift in the economy, and others arguing that the slow wage growth suggests there is still room for the economy to improve.

"This is the last shoe to drop in the labour market," said Torsten Slok, chief international economist at Deutsche Bank.

"It's just a matter of time before wages start going up more strongly, but there's frustration that it hasn't happened yet."

NYTIMES