A triathlete’s guide to the US labor market
I recently ran my first Olympic triathlon, and I learned three valuable insights in the process: First, preparation is the key to success. Second, sprinting is the enemy of endurance. Third, hydration and nutrition guarantee longevity.
These three insights can help us appreciate the state of the U.S. labor market as well as the risks surrounding the employment outlook.
On the face of it, the August employment report was very strong with the economy adding 201,000 jobs, following a soft 147,000 gain in July. And, while revisions showed 50,000 fewer jobs being added in June and July, the three-month moving average for payrolls remains very strong at 185,000 jobs per month.
The details in August payrolls data were encouraging overall, but some blemishes are worth highlighting. In particular, good-producing industries only added 26,000 jobs with manufacturing employment contracting by 3,000 jobs.
Seasonal factors may have played a role in automotive employment, but rising trade tensions could also be curbing enthusiasm amongst manufacturing. Meanwhile construction employment continues to rise strongly, which could provide a relief to a supply constrained real estate market.
The service sector added 178,000 jobs driven by the professional and business services, wholesale, health care and leisure sectors, while retail employment was constrained by expected weakness in clothing and department stores.
The U.S. economy has now added jobs every month since September 2010 — the longest stretch on record at 95 months — with nearly 1.7 million jobs already added since the start of the year.
At this pace, the economy is on track to add nearly 2.5 million jobs in 2018, which would represent the eighth consecutive year the economy has added more than 2 million jobs!
Preparation is the key to success
As triathletes will tell you, the key to success is preparation. While almost anyone in good shape could finish an endurance trial by alternating between running and walking, only well-trained athletes are able to maintain a steady and elevated pace.
In the context of the labor market, the relentless decline in unemployment has surprised many pundits. Indeed, the unemployment rate has fallen from 10 percent 10 years ago to just 3.8 percent in August.
While many considered 4.5 percent to represent the so-called full-employment unemployment rate, i.e., the lowest jobless rate that doesn’t create inflationary pressures, the labor market has continued to surpass expectations.
Just over the past 12 months, the unemployment rate has fallen an impressive 0.6 percentage points as the growth in payrolls has consistently exceeded the breakeven rate of payroll growth.
Looking at recent data on initial claims for unemployment, it appears the economy is well prepared and ready to run for longer. Just last week, initial claims reached their lowest level since December 1969, with only 203,000 new unemployment benefit claimants.
This points to further downward pressure on labor market slack, which could see the unemployment rate approach 3.6 percent by year-end — the lowest level in 50 years!
While naysayers will argue that this doesn’t reflect discouraged workers or part-timers wanting full-time positions, we note that the so-called underemployment rate reached a 17-year low of 7.5 percent in August, and it is headed even lower through year-end.
Sprinting is the enemy of endurance
Anyone who has competed in triathlons knows that starting too fast and sprinting too early are two rookie mistakes. The former will only lead to a more dramatic slowdown as the race goes on, and the latter will prevent you from reaching the finish line.
How does this relate to the labor market? With the unemployment rate testing new lows and businesses signaling increasing difficulties in addressing their labor needs, we should not be surprised to witness a gradual moderation in the pace of job growth.
It appears reasonable to expect monthly job growth to gradually slow in the coming months from around 200,000 jobs per month to 120,000 jobs per month, which is generally considered to be the pace that would keep the unemployment rate constant.
While some misguided pundits will decry this as an excessively slow pace of employment growth, we should recall that this is not a sprint, but instead a long-distance race where what matters more is endurance.
In that sense, one key risk to the labor market comes from the combined fiscal stimulus from the Tax Cuts and Jobs Act and the Bipartisan Budget Act.
Indeed, this supercharged boost to the economy risks representing the unnecessary sprint that cuts into the economy’s remaining stock of energy. It could also provide a misguided excuse for the administration to implement growth-reducing protectionist measures.
Hydration and nutrition guarantee longevity
Where does the economy’s fuel come from then? It comes from a gradual rebalancing between employment growth and accelerating wage growth. As workers become scarcer, we expect wage growth to pick up and provide additional fuel to household income growth.
In August, hourly earnings posted their strongest monthly increase in 2018 with a 0.4-percent month-on-month gain, pushing the wage growth to its strongest pace since the Great Recession at 2.9 percent year-on-year.
While this print is encouraging, it continues to fall short of traditional wage growth expectations in the context of an employment rate below 4 percent.
However, we know that low inflation, low productivity, a structural demographic drag on labor force participation and increased market concentration are key culprits for the historically moderate pace of wage growth.
It may be that slow and steady wins the race. In other words, with productivity only making gradual progress, slowly rising wage growth doesn’t exert excessive pressures on unit labor costs and thus preserves company’s bottom lines while gradually feeding consumer spending power.
The Fed is the race pacer
As Federal Reserve Chairman Jerome Powell eloquently described in his Jackson Hole symposium speech, the new Federal Reserve doctrine is “risk management,” i.e., how to best guide the economy toward a steady state without pressing too hard on the brakes or being overly ambitious in boosting the economy beyond its capacity.
In what has been a successful economic triathlon, the Fed will want to be the best race pacer possible.
As racers will tell you, the last miles are generally not run with the legs but more with mind and the will to succeed. As such, policy and political disruptions that would take our minds off of the objective could prove dramatic in this race toward the steady state.
Gregory Daco is the chief U.S. economist for Oxford Economics.
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