Recent recession talk was much ado about nothing

Recent recession talk was much ado about nothing
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The April jobs report, although not quite as good as the headline unemployment rate of 3.6 percent would suggest, was still very solid.

Normally, an unemployment rate below 4 percent, strong job growth and accelerating wage growth would be signals for the Federal Reserve to raise short-term interest rates to make sure that inflation doesn’t pick up.


But inflation has actually slowed in 2019 and has moved further below the central bank’s target. With few inflation pressures in the U.S. economy, the Fed is set to keep its key policy rate in its current range of 2.25 to 2.50 percent throughout 2019 and into 2020.

The unemployment rate fell to 3.6 percent in April, its lowest since December 1969, down from 3.8 percent in February and March. However, the number of jobs in the household survey (different from the survey of employers) fell by 103,000 in April.

The unemployment rate fell over the month because the labor force contracted by 490,000 in April, so the decline in the unemployment rate was not all good news. The labor force participation rate fell to 62.8 percent, from 63.0 percent in March and 63.2 percent in January and February.

The labor force participation rate is still far below its level of around 66 percent before the Great Recession. The broader U-6 unemployment rate (unemployed, underemployed and too discouraged to look for a job) held steady at 7.3 percent for a third straight month in April; this is the lowest the U-6 rate has been since March 2001.

The U.S. economy added a very strong 263,000 jobs in April, well above the consensus expectation of 180,000. After a weak initial gain of just 20,000 jobs in February (since revised up to 56,000), the economy added 189,000 jobs in March (revised down slightly from 196,000) and 263,000 jobs in April, clearly demonstrating that all of the recession talk earlier in the spring was much ado about nothing.

The three-month moving average of job growth through April was 169,000, well above the pace needed to keep up with underlying growth in the labor force, although down from an average of 223,000 per month in 2018. Private-sector job growth was 236,000 in April, while government added 27,000 jobs.

The tight labor market continues to push up wages. Average hourly earnings rose 0.2 percent in April, after a similar increase in March (revised slightly higher). Year-over-year growth in wages was 3.2 percent for a second straight month in April, well above the pace of inflation.

Recent wage growth has been the best since early 2009, when the labor market was imploding during the Great Recession. The tighter job market is leading to bigger wage gains as businesses raise pay to retain their current workers and attract new ones.

The U.S. economy is in good shape in the spring of 2019. The current economic expansion, which started in June of 2009, will hit the 10-year mark over the summer, tying it with the expansion that lasted most of the 1990s for the longest expansion in U.S. history.

The expansion will then continue at least through the rest of 2019. The economic fundamentals are generally solid. In particular, job gains and good wage growth will push household spending higher in 2019; consumer spending accounts for two-thirds of the U.S. economy.

The tax cuts passed at the end of 2017 and federal spending increases are also supporting growth in 2019, although those positive boosts will fade in 2020.

Job growth is likely to slow from its pace of 223,000 per month last year to around 175,000 this year, as the tighter labor market will constrain hiring.

The unemployment rate may move up a bit over the next couple of months but is set to reach a cyclical low of around 3.5 percent at the end of this year. Wage growth will continue to pick up as businesses find it more and more difficult to attract qualified workers.

Risks are weighted to the downside, including potential trade wars, slower global growth and geopolitical concerns like Brexit. Stronger labor force growth than expected, as higher wages bring more people into the job market, is the major upside risk.


The good April jobs report has reduced expectations for a near-term cut in the federal funds rate. At its recent meeting, the Federal Open Market Committee’s policy statement reiterated that it will be “patient,” signaling no change to their short-term policy rate, the fed funds rate, in the near term.

In a press conference after the meeting Fed Chair Jerome Powell said that the recent slowing in inflation is likely to prove “transient,” suggesting that the Fed will not need to cut the fed funds rate to push inflation toward its 2-percent objective (using the personal consumption expenditures price index).

Inflation has been consistently below the Fed’s objective throughout this expansion and has moved further below 2 percent in 2019. Right now, the fed funds rate is in a range between 2.25 to 2.50 percent, meaning that monetary policy is slightly positive for growth.

PNC expects the FOMC to keep the fed funds rate in that range into 2020, to allow for further improvement in the labor market and stronger wage growth that would push inflation back toward 2 percent.

Augustine Faucher is senior vice president and chief economist of The PNC Financial Services Group. Follow Faucher on Twitter: @gusfaucherpnc.