Job growth has meaningfully improved over the last several months despite the length of the existing economic cycle and the fact that the labor market is extremely tight. The current economic expansion is the second-longest on record, and if growth continues through this June, it will be the longest business cycle on record.
At the same time, the unemployment rate fell to a cyclical low of 3.7 percent in September. We have not seen a rate that low since 1969. Given this backdrop, conventional analysis strongly suggests that job gains will soon moderate.
However, this is not the case with the recent employment data, which shows an improvement in the underlying trend. And, if labor force participation continues to rise, the job growth can continue to advance for some time.
So what do the latest figures show? Nonfarm payrolls increased by 304,000 employees in January, the 100th consecutive monthly increase. This is a new all-time record. The January gain follows a strong 222,000 increase in December. What's more, the pace of job gains appears to be accelerating.
In fact, the three-month moving average in nonfarm payrolls trended higher last month, rising to 241,000 versus 232,000 in December. More importantly, this is sharply higher from November, when the three-month moving average was “only” 194,000.
For now, there is little evidence to suggest a white-hot labor market is cooling. Initial jobless claims are a leading indicator of hiring, and they recently hit a new five-decade low. When layoffs are down, hiring tends to be robust. The longer-term trend is also pointing to a quickening in the rate of job creation.
Instead of looking at the three-month moving average, another and arguably better way to measure job growth is to look at the year-over-year percent change. This calculation adjusts for the size of the job market.
Over the last 12-months, the level of employment is up 1.90 percent, which is the fastest rate since March 2016 (1.95 percent). The improvement has been a steady grind higher, suggestive of an uptrend likely to persist.
If firms are able to coax the unemployed and discouraged back into the workforce, the rate of job growth can certainly increase further. This is the case even though the labor market is extremely tight; the unemployment rate is presently at 4.0 percent.
What should investors be watching to see if this scenario plays out? Pay attention to labor force participation.
Fortunately, labor force participation appears to be breaking out to the upside after having been in a sideways trend since 2014. The rate rose to 63.2 percent from 62.7 in September, its largest four-month increase since early 2010.
Participation remains far below where it was in January 2008 (66.2 percent) when the economy entered recession. Consequently, there is room for significant further improvement.
We are encouraged to see that much of the recent rise in participation was led by prime-age working women of 25 to 54 years old. At 76.0 percent, their participation rate is the highest since February 2009.
These trends may persist going forward, which means that the economy could be in the unusual position of generating faster job gains in the later stages of the business cycle than the earlier stages.
Then again, the current business cycle has not conformed to standard post-WWII patterns, so investors should not be entirely surprised at such an outcome.
Joseph LaVorgna is the chief economist for the Americas at Natixis, an international corporate and investment banking, asset management, insurance and financial services arm of Groupe BPCE, the 2nd-largest banking group in France. He is a regular guest commentator on CNBC.