Employment, Inflation, and the Fed

The April Employment Report was not as strong as it seems, but still consistent with moderate growth in the overall economy, tighter job market conditions, and moderate wage growth. Wage growth is likely being offset by faster productivity growth (although results will vary by firm and industry), restraining inflation pressures from the labor market. Ex-food & energy, the year-overyear increase in the PCE Price Index fell to 1.6% in March, below the Fed’s 2% goal. However, Fed Chair Powell downplayed low inflation readings as being due to transitory factors, dampening those looking for a Fed rate cut.

The first thing one notices in looking at a graph of the monthly changes in nonfarm payrolls is that these figures are volatile. Payroll growth varies widely around an underlying trend. The data are subject to significant statistical noise and seasonal adjustment is often quirky. Weather can also be a factor. Sometimes unseasonably mild weather pulls forward seasonal gains. Sometimes poor weather pushes out seasonal job gains. The economy typically adds more than four million jobs between January and June. Unadjusted, we’ve added 2.126 million jobs since January, vs. 2.378 million over the three months last year. That’s consistent with an underlying pace of job growth that is somewhat slower than last year, but still relatively strong.

Scott Brown
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The unemployment rate fell to 3.6% in April, the lowest since December 1969 (3.5%). However, April’s decline was due to a decrease in labor force participation, particularly for the aged 25-54 cohort (which dropped from 82.5% to 82.2%). That looks like a problem with the seasonal adjustment. While the April figure was likely an aberration, the unemployment rate has been trending low. However, the low trend appears to be misrepresenting the amount of slack in the job market. While labor force participation dipped in April, the trend has been relatively flat. That’s actually a sign of strength, as the aging of the population implies that the participation rate should be trending lower. The employment-population ratio is below the pre-recession level, but not for those in the prime age cohorts (25-54). There appears to be room for teenagers and young adult to enter the job market, and a lot of those on the sidelines (without work, but not officially counted as unemployment) ought to be lured by better wages.