Welcome to the kaleidoscopic economy, where you can see a host of different views on whether the growth is picking up, all at one time.
Today’s jobs report did little to clear things up. The BLS said we added 288,000 nonfarm payrolls in April — well above estimates — and that the unemployment rate fell to 6.3%.
But they also said the labour force participation rate dropped, and that wage growth went nowhere.
As the Federal Reserve tries to absorb all this into its policy making deliberations, they are going to have to contend with divergent views on one important question: Is there slack in the labour market?
If there are lots of workers and not many jobs, the answer is yes. If on the other hand job seekers are able to find work with relative ease, the labour market is tight.
Unfortuntately, the data doesn’t do a great job of providing a clear answer.
Fed Chair Janet Yellen has indicated the Fed still sees slack.
But a chorus of economists have begun disagreeing. For the prosecution — those who say the economy looks good, and certainly much better than the Fed is saying — is Bank of Tokyo-Mitsubishi’s Chris Rupkey. He maintains that the unemployment rate is still the single best indicator of the state of the labour market. So, the fact we are approaching a 5.6% “full employment” level, he says, should be making everyone feel bullish. As he wrote this morning:
This is not a labour market recovery, the economy is not healing, the economy is full on here. THERE IS NO SLACK IN THE LABOUR MARKET. [caps his, bold ours — ed.] The future was uncertain until today, but now that it is certain, we got the report, the Fed needs to revise their exit strategy. In a hurry. With one giant leap this morning the labour market is closing in on full employment. … The economy is better than you think. And Fed officials are going to raise rates quicker than you think. Bet on it.
For the defence — those who share Janet Yellen’s view that there remains significant slack in the economy — is Josh Feinman of Deutsche Bank. He argues that our “scariest jobs chart in the world” chart of jobs gained since the recession is indeed still terrifying.
…We still think there is a lot of slack. Nonfarm payrolls are now finally back within a whisper of their January 2008 peak, and should breach that summit next month. We have gone 76 months with essentially no net job growth. Even using a conservative estimate of the “breakeven” rate of job creation — about 80,000 per month, consistent with slowing demographic trends — employment is still roughly 6 million shy of what might be considered ‘full employment.’ Even at a pace of 200,000 per month (120,000 above the breakeven rate), it would take about another four years to make up that shortfall entirely.
It’s possible we’re reading too much into the drop in labour force participation. That’s the view of UBS’ Drew Matus, who writes:
The participation rate has been between 62.8% and 63.2% for nine months and we see little reason to believe that the drop witnessed in April will be repeated. Indeed, the expiration of long-term benefits is the likely reason behind the drop in the labour force and suggests that not everyone receiving long-term benefits planned to return to the labour market.
The No. 1 Fed priority from a deliberative standpoint is commitment to whatever it’s doing so as not to rattle markets. For Société Générale, there has been nothing new that would suggest deviating from their current path.
There was nothing in today’s jobs report that has the potential of moving the needle on the pace of tapering, or on the rate
path. Despite the solid payrolls figures and the sharp drop in the unemployment rate, there was no follow-through in the wage numbers. The Fed’s extremely dovishrate path is based on the thesis that there is substantial slack in the labour market – beyond that apparent in the unemployment rate – and that it will cap wage gains and inflation. Today’s report is fully consistent with that view.
Ultimately, you could argue there was nothing to cause the Fed to deviate, but it also did nothing to resolve the inherent tensions between the no-slack and slackers.
“The persistence of the downward trend in unemployment, coupled with still-stagnant wage growth, will keep the lights burning late into the night at the Fed, but it will do nothing to settle the differences between the policy hawks and doves,” said Pantheon Macro’s Ian Shepherdson.
Seems about right.
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