April 03, 2024
The major anomalies in the January jobs report were reversed in the February report, showing the sharp drop in hours and big jump in hourly pay were in fact weather-driven. The 0.2 hour drop in the length of the average workweek reported for January was partially reversed in February, while the 0.3 hour drop for production and non-supervisory workers was completely reversed. In the same vein, the rate of growth in the hourly wage slowed sharply, putting the annual rate for the last three months at 4.0 percent, a pace roughly consistent with the Fed’s 2.0 percent inflation target.
One major concern that remains is the continuing gap between jobs growth in the establishment survey and employment growth in the household survey. The February report showed a gain of 275,000 jobs, while employment in the household survey actually fell by 184,000. The gap between job growth in the establishment survey and employment growth in the household survey over the last year now stands at 1,149,000.
As noted in the past, the job growth numbers in the establishment survey seem to fit much better with other data we see, such as weekly unemployment claims and the JOLTS data, as well as private sector sources like ADP and Indeed. One thing with certainty is that if the household survey is closer to the mark, then productivity growth has been even more rapid than the BLS data now show.
Hours and Wages
The index of aggregate hours through the first two months of this quarter was almost identical to its average for the fourth quarter. With GDP likely to grow by around 2.0 percent in the quarter, it looks like we will see another good quarter for productivity growth, barring a big surge in hours in March.
It likely will not be close to the 3.2 percent rate of the fourth quarter, but after three quarters where productivity growth averaged 3.7 percent, another quarter of respectable growth is a very good sign. It is still too early to be confident we are on a higher productivity growth path, but it is looking far more likely. It is also necessary to remember that there are often large revisions to these data.
The February wage data should have removed concerns about a reacceleration of wage growth sparking a reacceleration of inflation. In fact, the profit share of corporate income actually rose in the fourth quarter, indicating that wages are most definitely not driving inflation at this point of the recovery. The profit share of corporate income stood at 26.8 percent in the fourth quarter, only 0.5 percentage points below its pandemic peak of 27.3 percent in the second quarter of 2021 and well above the 24.3 percent average for 2019. Given this rise in profit shares, the economy can certainly sustain the current pace of wage growth without it leading to higher inflation.
Slowing Job Growth
The 275,000 jobs number reported for February did not cause much concern because it went along with sharp downward revisions to growth for the prior two months. Nonetheless, it is unlikely that an economy with 3.9 percent unemployment can sustain this sort of job growth for very long. We will likely see a number in the neighborhood of 170,000 in March.
Healthcare, restaurants, and the government have been the leading sectors for job gains in the last year. They accounted for almost 60 percent of the job gains in February. The growth in jobs in healthcare is somewhat concerning since if employment continues to grow at its recent pace (60,000 a month over the last year) it will almost certainly translate into higher healthcare costs.
The rapid recent growth in public sector employment is mostly just getting back jobs lost in the pandemic. Public sector employment is just 313,000 (1.4 percent) above its pre-pandemic level. By contrast, private sector employment is 4.0 percent above its pre-pandemic level.
Manufacturing and Construction
Manufacturing job growth has been weak in the last year with the sector adding just 24,000 jobs. Surveys from various Fed districts, as well as ISM, indicate continuing weakness. There is some divergence between the durable and non-durable sectors, with the former adding 74,000 jobs, while the non-durable sector lost 50,000.
Construction is continuing to add jobs at a healthy pace with a gain of 23,000 in February. Employment is up by 215,000 over the last year.
Unemployment to Edge Down
The unemployment rate has edged up from a low of 3.4 percent in April to 3.9 percent last month. The jump in February was likely an aberration, it had been 3.7 percent and certainly the strong job growth reported in the establishment survey is inconsistent with this sort of rise in the unemployment rate, as is other data on the labor market. For this reason, it is likely that we will see at least some drop in the unemployment rate. If that is the case, it will be the 26th consecutive month of below 4.0 percent unemployment.
Prime Age Employment Rates Stagnating
After rising back to pre-pandemic levels at the end of 2022, the prime age (ages 25 to 54) employment to population ratio (EPOP) has been little changed over the last year. There is a slightly better picture for prime age women than prime age men, with the EPOP for women hitting a record high of 75.3 for four months last year, 0.6 percentage points above its pre-pandemic peak. It has since then edged down slightly and now stands at 75.2 percent.
The EPOP for prime age men peaked at 86.6 percent last July, 0.1 pp below its pre-pandemic high. It stood at 86.3 percent last month.
Share of Unemployment Due to Quits
One somewhat disturbing item in the household data is the decline in the share of unemployment due to voluntary quits. This is a measure of workers’ confidence in the strength of the labor market, since it shows their willingness to leave a job before they have another job lined up.
This share fell to 11.0 percent in February, the lowest level since September of 2021. This is not a level that is consistent with a strong labor market. The quit share peaked at 16.0 percent in the tight labor market of 2022. In the last year before the pandemic, the share of unemployment due to quits averaged 13.6 percent. It would be good to see some rise in this figure in the March data.
Solid Job Growth and Low Unemployment
There is little reason not to expect more of the same, with jobs growing at a healthy pace and the unemployment rate remaining low. There are some grounds for concern, most notably the weakness in the household survey, but the March report may bring it more in line with other labor market series.
