June 04, 2024
The April jobs report showed the economy added just 175,000 jobs, the slowest pace in more than a year, while the unemployment rate ticked up to 3.9 percent. Many viewed these numbers as evidence of a slowing economy. That case was seriously overstated.
The March job growth number was only slightly below the 179,000 average for the three years prior to the pandemic. It is roughly in line, or above, the pace of labor force growth that is generally considered sustainable. Also, the February number was revised up to 315,000, putting the two-month rate at a very rapid 240,000.
On the household side, the uptick was even smaller than the 0.1 percentage point reported. The unemployment rate stood at 3.83 percent in March and rose to 3.86 percent in April, a rise of 0.03 percentage points. This is well within the survey’s margin of error.
Passing the 1960s Low Unemployment Streak
The economy matched the 1960s run of 27 consecutive months of below 4.0 percent unemployment in April. If we don’t see a rise in May, we will have surpassed this extraordinary streak. Given the extent of job loss in the pandemic, few would have envisioned this stretch of sustained low unemployment. This has given workers, especially those at the bottom end of the wage ladder, more bargaining power, allowing them to get higher pay and seek out better jobs.
Wage Growth Remains Moderate
The annual rate of growth in the average hourly wage for the three months ending in April was just 3.6 percent. The three-month rate of wage growth had been edging lower since peaking at an annual rate of 6.4 percent in late 2021. It did jump up in January, but it now seems as though that was a problem of the seasonal adjustment not correcting adequately for start-of-year pay increases.
If the slowdown continues, we are looking at wage growth that is only slightly higher than the pace in 2018–2019. The increase over the last year was 3.9 percent. That compares to a rate of 3.3 percent in the two years prior to the pandemic. If wage growth continues at the pace of the last three months, that would seem to be consistent with the Fed’s 2.0 percent target, even assuming no uptick in productivity growth.
Hours Growth and Productivity
Productivity growth slowed to near zero in the first quarter after three quarters in which it averaged more than 3.8 percent. The data are erratic, so this sort of slowing should not be especially surprising. It still left the growth over the last year at 2.8 percent.
The index of aggregate weekly hours edged down slightly from March to April. It looks like we will see a bounce back in GDP growth from the first quarter since that figure was held down by factors that are not likely to be repeated. If hours growth remains moderate through the rest of the quarter, it will translate into another good quarter for productivity growth.
The Gap Between the Establishment Survey and the Household May Narrow
The gap between job growth in the establishment survey and employment growth in the household survey increased in April, as the 175,000 new jobs reported in the establishment survey exceeded the 25,000 gain in employment reported in the household survey. The gap now stands at almost 2.3 million.
The establishment survey is generally more accurate since it is far larger and has a much higher response rate. However, the fourth quarter data from the Quarterly Census on Employment and Wages (QCEW), which was released last month, does support the case that there could be a substantial overstatement of employment in the establishment survey. The QCEW often does show a sharply different picture in a specific quarter, only to have it reversed in subsequent quarters.
It is again worth remembering that a slower pace of job creation than currently reported by the CES would translate directly into a more rapid rate of productivity growth. This would mean that the economy could support a more rapid pace of wage growth without leading to inflation.
Employment to Population Ratio for Prime Age Workers Should Edge Up
In April, the employment to population rate (EPOP) for prime-age women (ages 25 to 54) rose to 75.5 percent, a record high. For prime-age men it fell by 0.3 percentage points to 86.1 percent, 0.3 percentage points below its average for 2019. It is likely this drop was an aberration and that it will be reversed in the May report. Any rise in the overall EPOP will take us to at least the 80.9 percent level hit last summer, the highest since 2001.
Incorporated Self-Employment Remains High
There was a large jump in both incorporated and unincorporated self-employment in 2021 and 2022, compared to pre-pandemic levels. While unincorporated self-employment has fallen back roughly to pre-pandemic levels, incorporated self-employment is still more than 10 percent above its pre-pandemic level. This fits with the data from the Census Bureau that shows a large uptick in new businesses with a high propensity to employ workers.
Health Care Sector Likely to Again Lead Job Growth
The health care sector added 56,200 jobs in April, somewhat below its 63,000 average for the prior year. It is likely this sector will again lead job growth in May, but the pace of growth is likely to slow further. Restaurants and construction are also likely to again show strong growth.
The government sector, which had shown rapid growth through 2023, after lagging earlier in the recovery, added just 8,000 jobs in April. It is likely that its period of rapid catchup is over. Retail and manufacturing are also likely to show weak, if any, job growth.
The Share of Unemployment Due to Quits Likely to Rise
One anomaly in recent job reports has been the relatively small share of unemployment due to voluntary quits. It fell to 12.0 percent in April, it averaged 13.6 percent in 2019. This is a measure of people’s confidence in the labor market since it indicates that they are willing to leave a job before they have a new one lined up.
More Good News?
The labor market has been an overwhelmingly positive story for the last three years. If unemployment stays below 4.0 percent for the 28th consecutive month it will be cause for celebration. If the other data in the jobs report looks like they did in April, then it should help the Fed feel more comfortable about lowering interest rates.
Wage pressures did not cause inflation, but they could in principle sustain it. However, wage growth of under 4.0 percent should not be seen as a problem.
