Five key takeaways from another strong month of job gains
INSIGHT ARTICLE |
Yet another strong month of employment gains suggests the economy is growing at a faster pace than gross domestic product (GDP) data indicates. The past six months of job gains are consistent with what should be closer to a 3 percent pace of economic growth rather than the 2.2 percent rate in the fourth quarter of last year and what will likely show up as a 2.5 percent pace in the first quarter of this year. This inconsistency between job gains and GDP growth has important implications for the economy, the middle market and policymakers.
There are five key takeaways from the February jobs report.
1. Tightening labor market
With a quit rate of about 1.9 million per month (1.6 percent of the total United States workforce) and jobs-per-person down to 1.7 per person from a cyclical high of 7 in June 2009, the labor market is tightening. Modest wage growth is on track for this year and economic slack is narrowing. Under such conditions, once wage pressure begins to build it typically accelerates faster than policymakers anticipate. Thus, the chances for Federal Reserve action on interest rates and the normalization of monetary policy have increased significantly during the past several months.
2. Fed patience wearing thin
We made the case in the January (see Strong January Jobs Report Takes Aim at Fed Patience) that the Fed would remove the term “patience” from its policy communiqué in March to set the stage for the first rate increase in either June or September of this year. The removal of “patience” and coming rate increase should be understood by middle market firms as an indication of growing confidence by the central bank in the sustainability of recent employment gains and above-trend growth. (The long-term United States growth trend is 2.1 percent.)
3. Breadth and depth of job creation increasing
The six-month (78.5 percent) and one-year diffusion (81.9 percent) indexes, which are measures of the breadth and depth of job creation across the economy, are not only at cyclical highs but above that posted during the past two economic expansions. About 65.4 percent of the 278 total industries that reported gains in February indicated hiring remains strong. That will result in a broadening of prosperity beyond the upper quintile of income earners, and bodes well for those small and medium enterprises that rely on sustainable growth in aggregate demand beyond the tastes and preferences of upper-income households. If middle market firms are looking for a reason to increase plans for capital expenditures, the past year of job gains is it.
4. Strong employment gains for key 25-34 demographic
Job gains among those aged 25-34 imply a pick-up in the pace of residential investment, which should help boost GDP in coming quarters. The employment-to-population ratio of that cohort increased to 76.8 and is consistent with housing starts growing to 1.25 million this year from the current 1 million annualized pace. Rising household formation, better job creation and rising wages should underscore a much better environment for demand in both multi-family dwellings, which 25-34 year olds tend to favor, and the more upscale and expensive new homes that the upper-income earners tend to prefer.
Source: McGladrey, BLS
5. Expect strong economic rebound by midyear
While there are legitimate concerns about the effect of poor weather on construction and manufacturing, these data all point to a fairly strong rebound by midyear. In 2014 we saw a fairly significant disconnect between job growth, which averaged close to 200,000, while the economy contracted by 2.1 percent. Job creation has averaged 288,000 during the past three months, which suggests a much more solid trend in growth than that implied by the past four months of GDP data. Although winter has not yet departed, springtime is coming and it will arrive with better growth data, a pickup in capital expenditures and likely be accompanied by a modest gain in wages well above the cyclical average of 1.7 percent.
Source: McGladrey, BLS