March 10, 2006
Job growth strong, but not enough to spur inflation
Employment expanded by 243,000 jobs last month, the second best month for job growth in the past year, according to today’s report from the Bureau of Labor Statistics (BLS). Most industries added jobs, with the exception of manufacturing. Unemployment ticked up slightly to 4.8% from last month’s five-year low of 4.7%.
Hourly wage growth was up 0.3% over the month, and 3.5% over the past year, which was the highest annual growth rate since September 2001. With payrolls on a steady rise and nominal wages growing more quickly, this BLS report will likely encourage inflation hawks to argue for increasing interest rates. While it is undeniably clear that the labor market is improving, this should not be taken as prima facie evidence of nascent wage-push inflation. In fact, the growth in most workers wages is probably just about to catch up to inflation, resulting in the first real (i.e., inflation-adjusted) wage gains in years.
Revisions to the December and January BLS reports lowered payroll growth in those months by 18,000. Over the past three months, monthly gains have averaged 186,000; over the past year (excluding the two months most influenced by the hurricanes), payrolls have averaged 197,000. Though below the growth-rate trend of 250,000 at a similar point in the last recovery, various signals suggest the job market is finally back on track, consistently providing employment opportunities to job seekers and helping to drive faster wage growth.
Construction and service industries (which includes government) made significant contributions to February’s job gains. Construction added 41,000 jobs in February, despite weather problems in various parts of the country. Since the recovery, construction jobs have grown by 11%, compared to 3% for overall payrolls.
One potentially important trend within construction employment can be seen in recent job reports. As the housing market begins to cool, employment in residential construction may begin to slow, as fewer houses are built. However, in recent months, there is some evidence that jobs in so-called “residential specialty construction”—remodeling existing homes—are growing more quickly than jobs in home building. If falling home prices cool the building market, then this shift could help offset some of the resulting slack.
The health services sector has been another consistently strong growth area, up 18,000 last month and 10% over the course of the recovery.
Manufacturing, however, remains at an obvious outlier in the American job market, losing another 1,000 jobs last month. Battered by historically large, rising trade deficits and disadvantaged by the strength of the dollar against competitors’ currencies, factory employment is down 48,000 over the past year and 1.6 million (-10%) over the recovery.
The temp industry has shed jobs over the past two months. But in a job market with solid growth throughout the industries, this is generally considered to be a positive development, suggesting employers are more prone to commit to permanent hires than they were earlier in the recovery.
The ranks of the jobless increased by 153,000, leading the unemployment rate up 0.1% to 4.8%. This up-tick appears to have been partly driven by new entrants to the labor force who could not find work in February. These job seekers accounted for 9.4% of the unemployed, the second highest share in over a decade.
One negative indicator from the household survey was a sharp increase in the share of the long-term unemployed, that is, those jobless for at least six months. This indicator jumped from 16.3% in January to 19.0% last month, the highest level since last October. Though this important indicator of job availability has been improving in recent months, it remains stubbornly high, as too many workers are stuck for too long without a job.
Another negative sign from the household survey is the spike in the unemployment of African American men, up to 9.7% from the previous month’s 8.5%, and twice that of the overall rate of 4.8%. This series has been particularly volatile lately for reasons that are unclear. However, even with February’s spike, the black male unemployment rate is down two percentage points from last February.
Will all of this good news spur inflation? Not likely. The chart below shows why. While workers’ hourly wage gains are only now catching up to overall inflation, hopefully reversing in coming months the recent slide in their buying power, there is no evidence that the tightening job market is engendering wage-push inflation. Though falling unemployment has predictably led to faster nominal wage growth, core inflation has, if anything, decelerated slightly over this period. At the same time, trend productivity growth of about 3% is strong enough to pay for non-inflationary wage gains.
So, the message to the Federal Reserve is: don’t stop the party just when the workers are arriving!
—By Jared Bernstein with research assistance by Yulia Fungard.
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