The U.S. economy added 213,000 jobs in June, more than the 195,000 expected. Job numbers for May were revised up to 244,000 from 223,00. How is it then that unemployment jumped from 3.8% to 4.0%?
Welcome to the new reality where job gains are undone by an increase in labor force participation. It stood at 62.7% in May and rose to 62.9% in June. That 0.2% increase amounts to 601,000 folks who decided job prospects had improved enough to make it worthwhile.
What is worrisome is that, although we are close to the average labor force participation rate, it has averaged 62.99% since data compilation began in 1950, levels were much higher until recently. Throughout the 90’s and up to 2002, the average was closer to 67% and only dipped slightly, to 66%, with the advent of the Great Recession. Since then, however, labor participation steadily dwindled until plateauing below 63% since 2014. If labor participation was ever to normalize, i.e. get back to pre-Financial Crisis levels, it would mean a jump of 9.6 to 12.6 million new entrants into the job market. At the current job creation rate it would take 4.5 to 6.0 years to assimilate those workers with unemployment rates jumping to 7% in the interim.
So, maybe the job picture is not as rosy as it is currently being painted. Certainly, the wages side of the equation is not that alluring to prospective entrants. Hourly wages only rose 0.2% from the prior month and 2.7% over the year. They rose 0.3% and 0.15% in May and April, respectively, over the previous month and 2.7% and 2.4% over the previous year. If labor markets were tight, as many pundits claim, wage pressures should be much higher. Back in March 2000, for example, when labor participation was around 67% and the unemployment rate stood at 4.1%, average hourly earnings rose 3.6% on a year to year basis. Likewise, in 2008, when the labor participation rate was 66% and unemployment was 4.9%, average hourly earnings rose 3.7%.
While not gangbuster wage growth numbers, however, they should allay the Fed’s fears that wage pressures will lead to inflation growth above 2% anytime soon. Nevertheless, the “real” unemployment numbers should give Fed members pause. Maybe the job market and the economy are not as healthy as they surmise and perhaps caution is merited as they consider further rate increases. Instead, the June meeting minutes indicate the Fed considers conditions robust enough to remove accommodative language in their policy statement and that they should continue undaunted in raising the fed funds rate above the neutral level by next year.
About the only concern the Fed had was the flattening of the yield curve. Historically this is a harbinger for recessions, which led to a discussion regarding a recession lurking around the corner and global trade tensions as a potential cause.
Personally, I feel there is some stealthy, nefarious force behind those labor participation and wage numbers. My suspicion is that the demographic forces I have previously written about are at work here. And we should thread carefully on the economy’s brake pedal until we can be certain of those forces.