THE labour market data is full of conflicting signals, but the big picture is that the US economy is in pretty good shape. That’s worth celebrating, irrespective of what the “good news is bad news for interest rates” crowd tells you.
Consider the hodgepodge of data released by the Bureau of Labour Statistics (BLS) last Friday. On the positive side, the so-called establishment survey suggested that employers added a whopping 272,000 jobs last month, exceeding all 77 forecasts compiled by Bloomberg.
Average hourly earnings ticked up 0.4% from the previous month, the strongest reading since January (more on that later). But in addition to the establishment survey, the government also asks a smaller sample of households about their inhabitants’ work status.
That poll showed that the unemployment rate rose to 4%, from a previous 3.9%, and employment (according to a measure adjusted to conceptually match payrolls) actually fell by 456,000.
The contradiction helps explain why some observers see an economy that’s running “too hot” and others see an economy with emerging “cracks” that could be warning of a recession. I tend to fall somewhere in the middle.
Two government surveys tell different stories about the labour market. The Bureau of Labour Statistics makes no secret of the fact that tracking the labour market is hard and imprecise, and that’s especially true in today’s economy.
A surge of immigration in recent years has added to the labour supply in hard-to-measure ways, and an explosion of new business creation during the pandemic has also complicated the task of building a representative sample.
On top of all that, a wave of technology growth and government investment may boost productivity in ways that could change the way we define the level of healthy and sustainable payroll and wage growth.
All told, I still think the BLS’s monthly survey of some 119,000 businesses and government agencies is probably one of the best tools we have at our disposal in markets and policy making.
In addition to the large sample, it’s also timely and allows observers to conduct granular, sector-by-sector analysis.
May’s numbers suggested broad-based growth, with every sector adding jobs except for mining and logging. Higher-paying industries such as professional and business services and financial activities both saw payrolls bounce back.
But in a given month, the data has wide confidence bands. At a 90% confidence interval, all we know today is that US employers probably added between 137,600 and 406,400 jobs to US payrolls.
Given the conflicting signal from the household survey and other data (including the Quarterly Census of Employment and Wages), I’d be willing to bet that we’re somewhere on the lower end of that range. Still, that’s extremely decent – and good for the American people!
Is it too good? The “labour market is too strong” crowd worries that robust labour demand will force companies to offer over-the-top raises and offset them by increasing consumer prices, thus keeping inflation buoyant and forcing the Federal Reserve to keep policy rates high.
Yet, there’s been little evidence in recent years to support concerns about a so-called wage-price spiral.
In last Friday’s report, average hourly earnings for private nonfarm workers rose 0.4% from the previous month on a seasonally adjusted basis, the hottest pace since January, a number that fed into some of the consternation in bond markets.
Still, that increase came entirely from the seasonal adjustment process (which attempts to account for seasonal differences in labour market patterns), and the post-pandemic economy has made this calculation extremely difficult and perilous.
Unadjusted, average hourly earnings actually slipped a bit from the previous month. It’s not that the official number is “wrong,” but it should be treated with due caution.
All of these caveats about Friday’s numbers serve to point out the extreme peril in overweighting one’s view of the economy to a single month’s payrolls data.
For monetary policy in particular, I suspect that the decision on when to reduce interest rates from their two-decade high will be based squarely on developments in inflation statistics.
But in the meantime, the constellation of data suggest that the labour market is doing just fine. At the moment, that’s a good thing plain and simple, and there’s no need to overthink it. — Bloomberg
Jonathan Levin is a Bloomberg columnist focused on economics. The views expressed here are the writer’s own.
