Is The U.S. Labor Market Still Recovering?

by: Lior Cohen

Summary

The latest NFP report showed a gain of 151K jobs -- lower than expected.

The rate of unemployment fell to 4.9% -- its lowest level in years.

Is the labor market still heating up?

According to the last non-farm payroll, 151,000 jobs were added - market estimated 189,000 jobs. Despite this slightly disappointing number, the NFP also showed that the rate of unemployment edged down to a new low - 4.9%. Did this report indicate the U.S. economy in general and the labor market in particular heading in the right direction? And will this news be enough to tilt the scales for the Federal Reserve to reconsider raising rates any time soon?

Although the headline figure was below expectations and the lowest level in recent months, other aspects of the report were positive including in participation rate and wages.

The current participation rate is at 62.7%; the rate slowly picked up in the past few months. And while the rate has come down in recent years, any recovery in this rate could be a positive sign for the U.S. labor market.

For wages, the growth rate was still solid at 2.5%, year over year, and 0.5%, sequentially. And if wages keep growing at an even faster pace, while the rate of unemployment doesn't change much this could indicate that the labor market may have finally reached the elusive state of full employment. And reaching full employment is one of two mandates of the FOMC. The other - stable prices and in particular reaching the 2% core inflation target. If wages were to further rise, this could also start pushing up core inflation.

But the report also showed that the U6 unemployment, which is considered as a measure of "real unemployment", is still high at 9.9%. This rate hasn't budged in recent months and indicates that perhaps the labor market hasn't reached yet full employment. And many people are still working part time even though they wish to work full time.

It's also worth noting that the rate of unemployment is considered a lagging indicator for the state of the economy. And back in 2008-2009 during the U.S. recession the rate of unemployment was around 5% until mid-2008 and 6% until September 2008. The spike in unemployment came only afterwards. And the FOMC should also consider this possibility that there is an economic slowdown brewing underneath the surface. After all, the GDP for Q4 wasn't too impressive with a growth rate of 0.7% and personal consumption rose by 2.2% -- the lowest growth pace since Q1 2015. Since the growth of the U.S. economy is mostly driven by consumer spending, if this indicator is slowing down it doesn't vote well for the state of the economy.

Final point

At face value it seems the labor market is still improving with lower unemployment and rising wages. And if wages were to rise at a faster rate, this could reinforce this assessment. But the real unemployment remains elevated. And since the rate of unemployment is a lagging indicator, the U.S. economy could be slowing down, which will only reflect in the labor market months from now. Therefore, the results of this report should be taken with a grain of salt; the FOMC is also likely to be more prudent and may hold off raising rates until it becomes clearer on the stance of the labor market - is it still heating up or about to make a 180 degree turn for the worse?

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.