The February non farm payrolls report was better than most expected, with establishment employment estimated to grow by 236k jobs in Feb (mkt was ~170k), though net revisions took about 15k of these (Dec +23k to 219k, but Jan -38k to 119k).
The unemployment rate dropped back down to 7.7%, and though it is now moving in the right direction once again, it hasn’t moved much over the prior few months. Perhaps this is payback for dropping too quickly previously.
In terms of the recovery from the crash, the US labour market (as measured by establishment employment) is now as far away from the peak as is typical at the bottom of a ‘normal’ recession.
Sure, this is bad — but there is also a positive spin we might put on it. There are encouraging signs that we are starting to see some of the things associated with a normal end of a recession. Robust growth in cyclical interest rate sensitive sectors such as construction is especially encouraging.
There are also signs that temporary help hiring (a typical precursor to full time employment) is starting to pick up once again.
While employment growth has recently been lacklustre in Manufacturing, the work week has been extending – which typically presages a pickup in manufacturing employment.
Manufacturing hours simply do not extend much past this – current hours per week are about as high as they ever get. More people will be required to further boost production.
The general extension of average hours, and increase in employment has boosted aggregate hours — relative to total jobs, it is a little closer to the prior peak.
Of course, that leaves a still massive gap between where we are now and where we might have been had the prior trend held.
This relationship is a decent first blush at an output gap, and finding the difference pegs lost output at a troubling ~15% of output.
Reflecting the fact the the labour market is firming up somewhat, we are starting to see a pickup in wages growth.
As labour is the main input to production, you cannot have a core inflation problem without having a wages problem. The US is closer to a deflation problem than an inflation problem just now, so rising wages will be welcome.
So where does this place us with regard to the FOMC’s eventual exit from their current 85bn/month of buying?
A test laid by Chicago Fed Evans is averaging more than 200k payrolls jobs per month for at least a six month period. We remain a modest way below that pace just now, so it seems that tapering will be something that is only talked about at the March FOMC meeting.
The emerging trends are encouraging – but i think the core of the board (Bernanke, Yellen, Dudley) will want to see them develop further before making any changes.
Their new policy tools are working – let them work a little longer.