The monthly Employment Situation is scheduled for release by the Bureau of Labor Statistics on Friday, April 7th at 8:30 AM Eastern Time.
The collapse of the Silicon Valley Bank (SVB) and the resulting contagion added a major element of uncertainty to an economy that already was not following any clear course. There were already widespread concerns about both excessive inflation and recession. The problems in the financial sector increased the risk of the latter, although most indicators seem to show continued strength, especially in the labor market, where unemployment insurance claims remain at very low levels.
The problems at SVB showed up too late to have any effect on the March job data. At the soonest, we will see some impact in April. However, if the tightening of credit following the collapse persists, it will have an effect on the economy similar to a large rise in the federal funds rate.
Wages, Jobs, and Hours
The focus of attention in the March report will be on the factors that indicate whether the labor market is still strong enough to maintain an excessively high rate of inflation. The first, and most important, item here is the pace of wage growth.
We have seen the wage data jump around both due to erratic monthly numbers and large revisions to past data. The February jobs report showed weak wage growth for the month and also featured downward revisions to the prior two months’ data. As a result, the annualized rate of growth in the Average Hourly Earnings series for the three months from November to February was just 3.6 percent.
This pace of wage growth did not get nearly the attention it deserves. There were several periods in the years 2018 and 2019 when wages grew at this rate, or even slightly faster, with the inflation rate remaining at or below the Fed’s 2.0 percent target.
If wage growth remains near 3.6 percent, it is very difficult to envision a scenario where inflation is a serious problem. Productivity growth has averaged 1.4 percent since the start of the pandemic, which means that 3.6 percent wage growth should put the inflation rate close to the Fed’s 2 percent target since inflation is roughly equal to wage growth minus productivity growth unless we have an ongoing shift to profits.
However, we have seen the wage picture change dramatically in the past with a month of new data, so it’s possible the story will look very different after we get the March report. But if wage growth looks similar in the March report, then it would be hard to justify the widespread concerns about inflation getting out of control.
The rate of job growth has averaged 350,000 over the last three months. This is considerably faster than an economy near full employment can sustain. It is striking that wage growth has slowed considerably even as the labor market has tightened, but it seems unlikely that this pattern will continue. If we continue to see the pace of job growth exceed the rate at which the labor force is growing, we can expect some reacceleration of wage growth.
In this respect, it is worth noting that there was a drop in the length of the average workweek in February, which caused the index of aggregate hours to fall slightly, in spite of the large reported rise in employment. The hours data, like the wage data, are erratic and subject to large revisions, but the February data on aggregate hours do not show an excessive growth rate in the demand for labor.
Labor Force Participation
The labor force participation rates (LFPR) for most demographic groups are now close to pre-pandemic peaks. The overall rate for prime-age workers (ages 25 to 54) was 83.1 percent in February, which was equal to the pre-pandemic peak hit in January 2020.
The LFPR for prime-age women is now 0.2 pp above the pre-pandemic peak. For men, it is still down by 0.5 pp. The sharpest decline was for 35- to 44-year-old men whose LFPR is 1.6 pp below its pre-pandemic peak, although if we go back to the late 1990s peaks, the sharpest drop is a 4.5 pp decline among 25- to 34-year-olds.
The monthly LFPR data are erratic. Over the last year, employment growth in the household survey has consistently lagged behind the job growth reported in the establishment survey, so we may expect to see some catch-up in March, which would imply a rise in LFPR.
Share of Unemployment Due to Quits
The share of unemployment due to voluntary quits hit a record high last year, as workers feeling confident about their labor market prospects were prepared to leave a job before they had a new job lined up. The share due to quits fell back to 14.8 percent in February. This is still high, but below pre-pandemic peaks. If this edges down further, it will be more evidence that the labor market is normalizing.
Construction and Manufacturing Employment
The construction and manufacturing sectors have historically been the most cyclical components of the labor market. If the economy is moving towards a traditional recession, we should expect to see weakness showing up first in these sectors.
Construction employment has continued strong with the sector adding 24,000 jobs in February. Even the residential construction sector added jobs, with employment rising by 12,400 last month. This sector remains strong, because the number of houses under construction is still near its pandemic peak, in spite of a sharp fall in housing starts. This is due to a huge backlog of unfinished homes as a result of pandemic supply chain problems.
Manufacturing did shed 4,000 jobs in February, but all the losses were in the non-durable sector, not the durable goods sector which is traditionally the most cyclical. It will be important to see if the pace of job loss in manufacturing accelerates and also hits the durable goods sector.
Employment Growth in Lagging Sectors
While most sectors now have employment levels above pre-pandemic peaks, that is not the case with nursing homes, child care, and state and local governments. The first two sectors have had difficulty hiring in a strong labor market due to low wages and often difficult working conditions. Employment in the two sectors is still down by 12.6 percent and 6.7 percent, respectively, from pre-pandemic levels. Governments have had problems competing with private sector employers because bureaucratic processes make it difficult to raise wages.
All three sectors showed healthy job growth in February, with local government employment alone increasing by 37,000 in February, after rising by 36,000 in January. Continued job growth in these areas would be another sign of a normalizing labor market.
Another Strong Report, but Normalizing Labor Market
In short, we should expect the labor market to again look very strong in March. The pace of job growth is likely to slow from the prior three months, but we may see more growth in the household survey than in the establishment survey as the gap between the two surveys narrows. The biggest question will be what happens to aggregate hours and what wage growth looks like in the March data.
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