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The latest jobs report shows the unemployment rate was down to 3.9 percent in April, the lowest level since December 2000. But wages are only up 2.6 percent from a year ago. I joined the CBS Evening News to explain what that means for workers.
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Full employment is often described as the level of employment at which virtually anyone who wants to work can find employment at the prevailing wage. Given that over the last half century, the unemployment rate in the United States has ranged from a low of nearly 2 percent to a high of nearly 11 percent, what is the specific rate at which the economy has reached the magical level? According to the Federal Reserve, full employment is subjective. It’s “largely determined by nonmonetary factors that affect the structure and dynamics of the job market. These factors may change over time and may not be directly measurable.” In other words, your guess is as good as anyone else’s. In the Fed's March 2016 Summary of Economic Projections, the Committee estimated that the longer-run normal rate had a median value of 4.8 percent, but even if we drop to 4.8 percent when the government releases the March Employment report, that may not cut it.
The Fed also closely watches wage growth and hoping that it picks up from the paltry 2 to 2.5 percent seen during the recovery. Part of the problem is that even though job creation has been robust over the past few years, many of the new positions added have been lower paid ones, which has dragged down the average. As 538 Blog points out, this is perhaps why many American workers without college degrees are so angry. They have gone from working in factories, earning “more than $25 an hour before overtime” to the service sector, where “the typical retail worker makes less than $18 an hour…More than 80 percent of all private jobs are now in the service sector.”
Still, with the pace of average monthly job gains remaining above 200,000 and the labor market tightening, analysts believe that wage growth should accelerate this year. Until it does, most consumers are happy to see low inflation, which allows them to keep more of their paychecks. Indeed, the upward revision of Q4 growth to a still-slow 1.4 percent was due almost entirely from consumers, not from businesses. Consumer spending increased at a 2.4 percent annual pace in the final three months of 2015, up from a prior 2 percent estimate.
On Monday, the government will release data on Personal Income and Spending for March, which could provide a preview of the jobs report. Although wages have been disappointing, the addition of other income, like rental income, non-farm proprietors' income and investment income, the numbers look a little better: Personal income increased 4.4 percent in 2015.
MARKETS: Stock indexes snapped a five-week winning streak and that was before the holiday release of Corporate Profits, which fell 3.2 percent last year, versus increases of 1.7, 1.9 and 9.1 percent in 2014, 2013 and 2012 respectively. It was the first negative reading since 2008, but with energy prices moderating and dollar appreciation slowing, analysts expect that profits should rise this year, which could help the labor market.
THE WEEK AHEAD:
Mon 3/28:
8:30 Personal Income and Spending
10:00 Pending Home Sales
10:30 Dallas Fed Manufacturing Survey
Tues 3/29:
9:00 S&P Case Shiller Home Price Index
10:00 Consumer Confidence
Weds 3/30:
8:15 ADP Private Jobs Report
Thursday 3/31:
9:45 Chicago PMI
Friday 4/1
Motor Vehicle Sales
8:30 March Employment Report
9:45 PMI Manufacturing Index
10:00 ISM Manufacturing Index
10:00 Consumer Sentiment
Here’s the good news: there is only one more important week of economic data left before Labor Day weekend -- the last blast for summer occurs this week. The bad news is that given the geopolitical events transpiring recently, the economy may eventually be the least of our problems. That said, investors have continued to take the various global conflicts in stride -- maybe a full week on the economic calendar will get them going. They'll need to shore up their energy before shutting down for August. The fun starts with the government’s first estimate of second quarter growth. After a horrible first quarter, where the economy contracted by 2.9 percent, Gross Domestic Product is expected to show an acceleration to an annualized pace of 3 to 3.5 percent. The rallying cry for the economy is quickly shifting from “2014: The year that growth returned to the US” to “2014: Here’s hoping that second half growth will save us!”
The sluggish first half growth will be front and center for the Federal Reserve, which will conduct a two-day policy meeting this week. It is widely expected that the central bank will announce another $10 billion cut to its bond-buying program, reducing monthly purchases to $25 billion. Officials are also expected to keep short-term interest rates near zero, where they have been since the height of the financial crisis in late 2008. Because there will be no press conference or Fed projections at this meeting, investors will pay close attention to the accompanying statement, which will highlight the Fed’s view on recent economic improvement and accordingly, when the central bank might raise short term interest rates (estimates are for some time in the first half of next year).
Fed Chair Janet Yellen has made clear that her perceptions of a healthy economy hinge largely on a healthy labor market. This week will also feature the July jobs report, which is expected to show continued progress. In the first half of the year, the economy has created an average of 231,000 jobs per month, putting it on track to add more jobs this year than any year since 1999. Economists predict that 225,000 jobs were created in July and that the unemployment rate will remain at 6.1 percent, the lowest level since September 2008.
Of course the labor market is more than just the unemployment rate or the number of jobs created. Whenever I write about the labor market, I receive a bunch of comments that say something like: “Sure the economy is adding jobs, but they are crappy, low-paying jobs!” Indeed, job creation during the sluggish recovery has been skewed more towards lower wage industries, like hospitality and retail.
But the tide may be turning, according to the folks at Capital Economics, who note “the overall quality of the jobs being created is rising. Based on the mix of jobs added in each sector and the average weekly earnings within those sectors, our calculations suggest that the 1.3 million private sector jobs created in the first six months of this year paid an average of $867 a week. That’s slightly higher than the average of $843 per week that the existing 117 million private sector workers earn. The upshot is that the jobs created this year, have been of a slightly higher quality [than last year].”
Given that wage growth has been stuck at about two percent a year, just about matching the pace of inflation, it is no wonder that consumer spending has been spotty during the recovery. It is imperative to see an increase in take home pay for the average American worker, if we have any hope for a new, faster pace of economic growth to take hold in the second half of the year, and beyond.
MARKETS: Despite Friday’s sell-off on disappointing results from Amazon and Visa, earnings season has generally been better than expected. With nearly half of the S&P 500 having reported, 76 percent have beaten earnings expectations and 67 percent have reported above sales estimates, according to FactSet. Earnings growth for Q2 is growing by 6.7 percent, which is ahead of expectations for 4.9 percent growth as of June 30th. The telecom services sector is reporting the highest earnings growth for the quarter, while the Financials sector is reporting the lowest earnings growth.
THE WEEK AHEAD: In addition to the highlights mentioned above, the week ahead will feature reports on housing prices, monthly automobile sales, personal income and spending, manufacturing and consumer confidence.
Mon 7/28:
Coach, Herbalife
10:00 Pending Home Sales
10:30 Dallas Fed Activity report
Tues 7/29:
American Express, Pfizer, UPS, Twitter
9:00 Case Shiller home price index
10:00 Consumer Confidence
Federal Open Market Committee begins
Weds 7/30:
Kraft, MetLife, Whole Foods
8:15 ADP Private Jobs Report
8:30 Q2 GDP (1st estimate)
Federal Open Market Committee concludes
Thurs 7/31:
Avon, MasterCard, ExxonMobil, Conoco
8:30 Weekly Jobless Claims
10:00 Chicago PMI
Senate panel discusses results of a report on "too big to fail" banks (remember that?)
Fri 8/1:
Chevron, Clorox
Automobile Sales
8:30 July Employment Report
8:30 Personal Income and Spending
9:45 PMI Manufacturing
9:55 Consumer Sentiment
10:00 ISM Manufacturing
10:00 Construction Spending
