Is The Labor Market Still Recovering?

by: Lior Cohen

Summary

The recent NFP report showed a higher than expected gain in jobs and wages.

But is the labor market still recovering?

Is the labor market ready for the Fed to raise rates?

The latest non-farm payroll showed another strong gain in number of jobs and moderately higher wage growth of 2.3%, year on year. But is the labor market still recovering? Is this report good enough to convince the FOMC to raise rates in the coming meetings? According to the latest Market Watch update, the chance of rate hike in June are only 26%. In order to assess the progress of the labor market let's examine several aspects of the labor market to answer this question.

Over the past year alone more than 2.6 million jobs were added to the labor force. This growth, however, is a bit lower than the number of jobs added in the preceding twelve months - over 2.8 million jobs. But considering the rate of unemployment is very low at 5% the growth in jobs is expected to slow down.

And the following chart could demonstrate the reason why some think the labor market is heading in the right direction: The chart shows the real unemployment", also known as U6 unemployment, and labor participation rate over the past few years.

Click to enlarge

Source: FRED

As you can see, since September the participation rate has slowly climbed back up to 63% -- the highest level since March 2014. And the U6 has also come down by 1.1 percentage points over the past year. Albeit it didn't change much over the last few months. This could indicate that even though the unemployment rate isn't falling, more people are still reentering the work force; another way to look at it, wages have risen enough to encourage people to reenter to work force. And if wages were to further rally, more people will seek a job. But as we saw in the past few months, wage growth wasn't steady - in the previous report wages declined on a month over month basis. Therefore, the recovery could still be on shaky ground. And the rate of unemployment remained at 5% (U3) and close to 10% (U6) for a while with wages only picking up from an annual average rate of 2.2% (in annual terms; back in 2015) to an annual rate of 2.4% -- the average of the first quarter of 2016. This is a very slow gain in growth path. And if the FOMC were to raise rates twice - as the FOMC currently projects it will - this could curb even further down the rise in wages. And without higher salaries, fewer people will join the labor force.

In summary, the labor market continues to slowly improve with higher wages, albeit at a slow pace, and low unemployment. The ongoing rise in number of jobs along with the slowly increasing participation rate suggests more people are reentering the labor force. But this recovery could still change direction especially if wage growth falls to a lower rate. The Fed lowered its outlook -as indicated by the dot plot -- for the number of rate raises this year, which will keep helping the U.S. labor market to rally. As long as we aren't seeing a wage growth of at least 3%, the labor market still has more room for improvement and the Fed is more likely to hold off from raising rates in the near term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.