This morning, the jobs report came in with a surprising miss: the total number of jobs created dropped from 339,000 in February (including a 26,000 upward revision to the initial figure) to 103,000. This is quite a drop. At face value, it raises concerns about whether the economy has slowed dramatically. But while the headline number is weak, the report is not nearly as bad as it looks.
A look at the numbers
This is the weakest job creation in six months, which is a concern. But February’s strong number was the best in the past two and a half years. This kind of back-to-back swing is not unusual in this data series. In fact, it bounces around quite a bit. To get a real sense of what the data means, it is better to look at a multi-month version. The average for the year so far, for example, is 201,000 jobs gained per month, which is above the 182,000 per month of 2017. Not too shabby. On a direct basis, Q1 2017 to Q1 2018, job growth is also up: from 594,000 to 616,000. Finally, on a year-to-year basis, job growth remains healthy at 2.199 million—just above where it was at the end of 2017. So, while the monthly number wasn’t great, the long-term trends remain solid.
The average workweek. Another way to look at the economic impact here is to consider the length of the average workweek. If labor demand were really slackening, you would expect not only slower hiring but also that existing workers would be working less. This is not the case. The average workweek was steady at 34.5 hours, a very healthy level. Employers continue to work existing employees hard.
Unemployment and underemployment. Yet another way to view the impact is to consider the unemployment and underemployment rates. If the economy were weakening, more people would be out of work. Instead, the unemployment rate remained steady at a very low 4.1 percent, close to the lowest level ever seen. The underemployment rate dropped further, to 8 percent—the low for this recovery and the lowest level seen in the mid-2000s boom.
Wage growth. Finally, even though hiring slowed, wage growth continued. For the quarter, wage growth is at the highest level since 2008 on a quarterly basis. Again, if the economy were slowing, wages would not be rising. In fact, they are doing so at an accelerating rate.
What’s behind the slowdown?
Given all of these facts, there are two possible reasons for the slowdown in hiring. The first is simply normal volatility. Hiring tends to vary from month to month. After a big January and February, this might have been a natural break. This is the most likely explanation, but we will have to wait until next month’s report to see if it makes sense.
The other—and more concerning—possibility is that we really are reaching the end of the supply of labor, that everyone who wants a job now more or less has one. If so, that would naturally slow hiring. It is also consistent with the fact that if you compare the number of open jobs with the number of unemployed people who are looking, the ratio is about equal to one. This would also be consistent with continued wage growth, as employers are forced to pay more to attract the workers they want. This is a real possibility. If this is the case, we should expect to see job growth slow over the next several months. This will be something we need to watch for.
Either way, despite the weakness this month, the probability is that the recovery continues and that this is nothing more than a blip or an actual sign of success in that we are at full employment. From the Fed’s perspective, the fact that the unemployment rate remains low, and wage growth continues, means that more interest rate hikes continue to be the most probable course.
Nothing in this month’s report indicates trouble ahead. Again, while the weakness is something to watch, the big picture remains solid. If we get another weak report next month, it will be time to take a closer look. For now? Just keep calm and carry on. That is, I suspect, what the Fed will be thinking as well.