February Jobs Report
…Economy adds 313,000 new jobs. Unemployment rate 4.1%. Wages barely budge. Wall Street loved the numbers.
Financial Review by Sinclair Noe for 03-09-2018
DOW + 440 = 25,335
SPX + 47 = 2786
NAS + 132 = 7560
RUT + 25 = 1597
10 Y + .03 = 2.89%
OIL + 1.64 = 61.76
GOLD + 1.80 = 1324.40
The economy added 313,000 new jobs in February, the biggest gain in a year and a half. The unemployment rate was unchanged at a 17-year low of 4.1%. The increase in hiring easily surpassed estimates of 200,000 to 220,000. The economy added 54,000 more jobs in January and December than previously reported. Altogether, the economy has gained an average of 242,000 new jobs in the past three months. That’s much stronger than the 182,000-monthly average in 2017. The February year-over-year gain was 2.28 million jobs. The economy has now added jobs for 89 straight months – that’s a record.
Despite the big increase in hiring, wage growth did not keep up. The average hourly wage grew by 0.1 percent. It grew by 0.3 percent in January. Hourly pay rose 4 cents to $26.75 an hour, but the yearly increase in wages tapered off. The 12-month increase in pay slipped to 2.6% from a revised 2.8% in January.
That increase in wages last month fueled inflation worries and sparked a sell-off on Wall Street and speculation that the Fed might raise rates at least four times this year, rather than the three increases expected. The amount a worker earns per hour has been rising gradually in the past few years, but wage gains still trail the 3% to 4% annual increases that typically prevail at the height of an economic boom. A strong jobs report with less wage inflation is a Goldilocks scenario for Wall Street.
The labor force grew by 806,000, pushing the participation rate back up to the 63 percent mark. This is the reason the unemployment rate remained unchanged at 4.1%, because so many workers were coming off the sidelines. After years of declining participation in the labor force, people between 25 and 54 have been flocking back into the labor market and getting lots of jobs over the past three years. The percentage of this age group that is working rose to 79.3% in February, the highest level since June 2008. At the worst of the recession, fewer than 75% of people between 25 and 54 were working. Over the past three years, the population of 25- to 54-year-olds has grown by 1.28 million, but employment has grown even more — 4.1 million. The all-time high for the employment-population ratio for working-age people was 81.9% in April 2000. Getting back to that level would put 3 million more people back to work.
The 4.1% unemployment rate refers to a measure from the Department of Labor known as U-3; an alternate measure, known as U-6, includes unemployed plus underutilized workers, or people who are working part-time but would prefer to be full-time. The U-6 unemployment rate was unchanged at 8.2%.
So, if we are trying to figure out what full employment looks like, it is not just the headline unemployment rate of 4.1%; we also have to consider underutilized workers, and potential workers that have been on the sidelines. This gives us a better idea of how much slack is in the labor market. As long as there is still slack in the labor market, employers can keep wages under control. And while many employers gripe about the lack of skilled workers, the truth is that there are still many workers on the sidelines. For the past 10 years or more, the employers have held the power – they could offer lower wages, and if a candidate did not like the offered wages, there was another qualified candidate (or even an over-qualified candidate) willing to take the job. As the labor market gets tighter and we get closer to full employment, we should start to see a shift in power. Some of the early signs are that employers give up on the idea that they will find the mythical “perfect” job candidate and they will hire someone who can just get the job done.
In the past few months, we have started to see a shift in power. While the federal minimum wage remains at $7.25 per hour, some states have opted to increase it to more than $10. Minimum wage workers in 18 states saw an increase at the start of the year; that makes 29 states that now have a minimum wage higher than the federally mandated $7.25 per hour – where it has been stuck since 2010. Looking at the growth of employment, both overall and in three low-wage sectors (retail, leisure/hospitality, and food services, a subset of leisure) we find that states that raised minimum wage above the federal level job growth was slightly faster and unemployment fell a bit more, both overall and in the lower-wage sectors – compared to states that did not raise their minimum wages. It is becoming clear that most minimum wage increases don’t displace most workers; they just raise their pay, as intended. That’s not to say no one ever loses a job or hours of work due to higher wage floors. Nor is it to say that a minimum wage of any level could be handily absorbed, even in low-wage states. But it does tell us that in a strong economy, wages and prices can move higher without crashing.
Another couple of examples came this week. Target announced it will raise its minimum starting pay for workers for the second time in less than a year after seeing a bigger and better pool of candidates. The retailer, which hiked starting pay to $11 an hour last fall, said all workers this spring will receive a minimum of $12 per hour. Target says they are getting more job applicants now, 60% more. Target said in September that at $11, its starting hourly wage was higher than the minimum wage in 48 states.
Meanwhile, a dramatic and possibly illegal statewide job walk-off by 35,000 public school employees in West Virginia that began Feb. 22 ended Tuesday in a victory for the educators. The state’s governor had first proposed a one percent pay raise – not enough to keep pace with inflation. Adding to the pain, West Virginia told its school employees that many of them would have to start paying $300 more a month in health care premiums. The strike ended only after the governor signed a bill giving them a 5 percent raise effective July 1 — so instead of getting 1 percent a year, they get 5 percent this year. The statewide teachers strike in West Virginia was the largest such strike in the nation in the past several years. With no collective bargaining rights, no contract, and no legal right to strike, the teachers managed to mount a statewide work stoppage anyway, and make their demands heard, marshal public support, and stick together until they won. You have to wonder if this might just be the start.
February’s report is significant for another reason. With Trump’s move to put tariffs on steel and aluminum imports and growing talk of a trade war, last month’s numbers could establish a baseline to measure the impact of trade restrictions and retaliation over the coming months. Manufacturing job gains, for example, totaled 31,000, more than twice the January figure.
Looking at other sectors: Retail trade employment increased by 50,000. Construction added 61,000 jobs. Professional and business services gained 50,000 jobs. Financial activities added 28,000 new jobs. Leisure and hospitality up by 16,000. Transportation increased by 15,000. And government added 26,000.
Today’s report gives a green light for the Fed to hike interest rates at its FOMC meeting later this month. For a couple of years now, there has been a vigorous debate over just how close the American economy is to full capacity, a discussion that has particularly big implications for how the Fed manages monetary policy. On one side of the debate, the hawkish crowd argues that inflation is right around the corner. On the other side, the doves argue that there is still room to run. Wall Street has been particularly focused on wage growth as an indicator of which story is more compelling. In January, when the year-over-year rate of growth in average hourly earnings rose to 2.9 percent, it even set off a mini-panic in the stock market, contributing to a broad reassessment of inflation risks in the economy. In today’s report, the wage number for February dropped back to 2.6 percent, but offered up a whole bunch of new jobs for anyone who wants to work – kind of a sweet spot in the economy, at least for now.