January’s solid gain for jobs and wages supports household incomes and thereby consumer spending. The trend improvement in aggregate hours indicates more production and 2.5-3 percent GDP growth in 2018.
January Jobs at 200,000: Solid Sign for Income and Growth
Nonfarm payrolls rose 200,000 in January with the three-month average at a solid 192,000 jobs. Job gains are consistent with 2.5-3.0 percent economic growth in the first half of 2018, with steady consumer spending, better business investment and a likely FOMC March rate hike with another one in Q2-2018. The diffusion index indicates that 63 percent of industries added jobs in January compared to 52 percent a year ago.
Jobs gains appeared in many sectors including business services, trade & transport as well as education & health (top graph). Only information services jobs have declined in each of the past three months due to drops in jobs in telecommunications and motion pictures.
Over the past three months, aggregate hours worked are up, consistent with continued growth in personal income, personal consumption and overall GDP growth.
Wages: A Micro Model on Inflation and Productivity
Nominal average hourly earnings rose 0.3 percent in January and are up 2.9 percent over the year. While job growth remains strong, the gradual rise in earnings over the past six months signals higher incomes but also pressure on profits as firms have modest top-line pricing power (especially in the goods sector).
Longer term, the subdued inflation readings and weak productivity numbers have limited the gains in nominal wage growth (middle graph). Lackluster productivity growth in the current cycle has weighed on wage growth and will likely continue to hamper wage appreciation. Moreover, inflation has been persistently below the FOMC’s target of 2 percent and has struggled to sustain upward momentum. With both productivity growth and inflation continuing to prove sluggish, it is not altogether surprising that wage growth has disappointed given the performance of the fundamentals.
Achieving Higher Economic Growth: Need Participation
Quarterly annualized GDP growth rates of 3 percent are not out of the question; however, sustained growth of 3 percent should largely be written off if the labor force participation rate does not improve. Structural issues continue to hold back growth in this metric. While the labor force participation rate for men is higher than for women, growth in the prime age participation rate during this expansion has been led by women. The overall labor force participation rate peaked in the early 2000s and trended sharply downward until 2016, where it has been relatively stable at just under 63 percent.
The unemployment rate held steady at 4.1 percent, its fourth consecutive month at this rate. We expect the unemployment rate to decline as employment growth outpaces growth in the labor force.
