DATA WATCH: EMPLOYMENT & PERSONAL INCOME, 12/15/17
CENTRAL EMPLOYMENT INDICATORS
October was (another) fair-weather employment month. The CES (NFP) employment change for October (+228K) was slower than last month but still marginally above the forecast (+195K). With last month's very large NFP gain revised down (from 258K to 244K), we have two about-equally-good months back-to-back.
Steady jobs growth was welcome news to the Fed, which agreed to raise the Fed Funds rate for the third time this year (to 1.25-1.50%). Two voting FOMC members, Charles Evans of the Chicago Fed and Neel Kashkari of the Minneapolis Fed, voted against the raise, saying basically that the Fed should wait until the inflation actually arrives before trying to shoot it down. The other members—including new Fed chairman Jerome Powell and outgoing chairman Yellen, who has previously disavowed this "wait until you see the whites of inflation's eyes" sort of argument—disagreed. What's more, according to the dot-plot, the FOMC is anticipating three further hikes in 2018.
If you look away from wages and prices, there are certainly near-term signs that the job market is getting tighter this month. Specifically, on monthly moving average crossovers (MMAvg; see second chart below), the last two months have been beating the 3-month averages. Attitudinal expectations in particular are rising—maybe due to the impending tax cut? (See next section.)
Still, the longer-term trend remains deceleration. YoY, both October and November CES gains were 1σ+ below the five-year (z score) trend. On monthly moving average crossovers, the last 12 months are trending below the last 24.
Other observations:
- The core of the slowdown is the service-providing sector, which was doing so well earlier in the recovery. In services, while we see some near-term speed up, we’re seeing some deep red on the longer-term crossovers. Because services comprise 86% of all employment, they steer the ship.
- But give goods-producers their due: They’re not only growing faster than services, they’re also often besting the five-year trend and beating many of the crossovers. The employment component of the Fed manufacturing diffusion metrics (like Empire and Philadelphia) are down from their crazy jump in October—but still show large YoY gains. Ditto for employment in the manf ISM, which is an amazing 2 or 3σ over many of its crossovers. Say what you want about the Trump economy: It’s delivering on its promise to tip the workforce toward those who build stuff. (Just pray that the dollar stays low and oil stays high!)
- Fed red light: Average weekly hours gained a tick in October, though it remains below its 2014-15 peak. If you're looking for genuine sign of labor-market tightening, this is one.
- Fed green light: The total employment-population ratio has ticked down over the last two months even while the NFP gained. All of this job loss has been happening in the 18-24 age bracket. Due to the small sample size, CPS (household survey) data are much noisier than the NFP numbers. Still, it may be a sign that the labor-market is not as tight as we thought—a question we return to below (in Employment and Population by Age and Gender). We've also seen, this month, an uptick in the U-1 and U-6 rates. These too need watching.
INFLATION AND SECONDARY INDICATORS
What will force the Fed’s hand of course is wage and price inflation—and here the overall movement is toward acceleration. (The Fed isn't making this stuff up.) But there enough contrary indicators to remain cautious.
Specifically:
- Fed red light: The CPI is hitting YoY > 2.0% more often this year than over any of the past five years—and this month it did it again (at 2.23%, 2+ σ over five-year trend). Though the alternative measures—Core CPI, PCE, and Core PCE—are lower, they are also above trend.
- Fed red light: Average nominal wages, at about 2.3% YoY, have been 2.5+ σ above trend for the past two months. (Though, to be sure, this growth is below most of the last 18 months, to the Fed's dismay.)
- Fed red light: Market measures of inflation expectations are above trend and have been growing over the past six months.
- Fed red light: Both of the New York Fed's "Underlying Inflation Gauges" are both way above trend and are at or near post-GFC records. The UIG is on fire and accelerating in November. If their model is right, the economy is overheating right now.
On the other hand:
- Fed green light: November mostly saw an easing off from October's hotter numbers.
- Fed green light. The Atlanta Sticky and Sticky Core CPI—while both greater than 2%—have dropped sharply from where they were in 2015 and 2016. (See the negative 12-24 MMAs.) It could be argued, however, that all these red-shaded core and sticky MMAs are not really meaningful since these measures temporarily surged MoM while energy prices were falling.
- Fed green light. Similarly for the market expectation measures: While now trending up, they remain below where they were during the "reflation scare" early in the Trump presidency.
Most of the secondary indicators are rising as well, especially (last month) those relating to future employment expectations. This may in turn reflect expectations of the impact of a business tax cut.
- The Conference Board's net "future job availability" rose sharply (to 11.6%) in November.
- The NFIB's "plan to increase employment" jumped by 2+ σ over trend in November. And it's not just small businesses that are pumped. The Business Roundtable CEO Economic Outlook has reached the highest level since 2012.
EMPLOYMENT/POPULATION BY AGE AND GENDER
In the long run, employment can only grow as fast as population. In the typical business cycle, employment drops abruptly during a recession (both in absolute numbers and as a share of the population). Then, during the subsequent long recovery, employment steadily grows both as a result of population and also (actually, mostly) as a result of a rising employment-to-population ratio. Typically, when this ratio reaches its maximum sustainable level and job growth slows to just the population growth rate, wage and price inflation begin to rise—and, yes, the Fed responds. A warming job market alongside slower overall job growth is a classic hallmark of a late-expansion economy.
This is where we are today. YoY job growth, now around 1.3%, has fallen well below its peak (over 2.0%) back in 2014—when YoY GDP growth was also peaking.
In the typical pattern, a recession will ultimately plunge the job growth rate deep into negative territory. After which, rinse and repeat. But even if we are lucky enough and/or the Fed is wise enough to avoid another recession, job growth must slow to population growth once the employment-to-population ratio has maxed out. And the twist this time—thanks to large (Boomer) cohorts retiring and small (late-wave Millennial) cohorts arriving—is that the rate of working-age population growth is currently very low. In 2017, it is 0.35%. In 2018, it will fall to 0.28%. By 2021, it will bottom out very near zero (0.10%). Absent a sudden productivity miracle, the constraints on real GDP growth (again, even if there is no recession) are likely to be severe.
The critical question is this: How close are we to maxing out on our employment-to-population ratio?
A quick and dirty way to answer this question is to look at the entire adult population at the last cycle peak and assume that is probably around where the maximum lies. Applying that method, you see that the employment ratio last peaked at around 63.0% in 2007, bottomed at 58.5%, and is only back to just over 60.0% today. Conclusion: We are only about 40% recovered from our recession. We have three full percentage points of population to go. That's over 7 million potential workers. Ergo, we are nowhere near maxing out.
Ah, but there's a reason this method is called quick and dirty. It doesn't adjust for the changing composition of our population by age. And today such an adjustment is essential. With Boomers aging and retiring, a much larger share of our population is shifting into age brackets in which low employment rates are the norm. And with Xers moving into midlife, a smaller share of our population is shifting into age brackets in which high employment rates are the norm. Let's look again at the employment-to-population ratio, but this time keeping the age-bracket weights constant at their 2007 levels.
According to this age-adjusted measure, we are very nearly all the way back to our peak 2007 employment-population ratio. In other words, we are indeed roughly at the max-out level.
One way to visualize this is to look separately at the employment ratios of age and gender group. While the ratios for all men and all women remain considerably below their 2007 high, the ratios for most of the individual groups are near, at, or above their 2007 high. Specifically, all brackets older than age 55 are working well above their 2007 levels. And women under age 55 are, net, about at their 2007 level—with first-wave Millennial women (age 25-34) well above and first-wave Xers (age 45-54) and youth (age 18-24) lagging behind.
So who else is still lagging behind? Men under age 55. Xer men (age 35-54) still lag behind by about one percentage point. And Millennial men (under age 35) by three or four percentage points. Is it likely that a lot of these men will yet return to active employment? We argue that it is not likely. (See: “The Missing Male Worker.”) In which case, as noted above, we may be closer to the employment ceiling than many suppose.
Interestingly, more than all of the November relapse in CPS employment-population ratio came from big declines in young men and women under age 25. Nearly all prime-age workers age 25-54 continued to make gains.
PERSONAL INCOME, JOLTS, & WAGE TRACKER
The salient feature of the most recent monthly NIPA personal income numbers is their extraordinary stability. Note how many white cells there are in the table below—showing that everything here is pretty much humming along its five-year trend track. Total wages may be slowing a bit, but that’s been made up by accelerating capital income. As we predicted (looking at retail), the PCE surge that we observed in September pulled back again in October. Given the new retail pop in November, though, it's likely PCE will surge again. We could see the personal savings rate fall to a new post-GFC low. Merry Christmas!
The BLS JOLTS data continue to show a pretty hot labor market with lots of job openings, few layoffs, and relatively few job seekers or hires relative to the number of openings out there. All four indicators related to openings are at least 1+ σ above trend during each of the past four months. The JOLTS data also show, however, a less "dynamic" economy than we had at the last two cycle peaks: The churn rate, the hire rate, and the quit rate are all well below what they were in 2005 or 2000. Curiously, over the last few months, the churn late has been declining.
The Atlanta wage tracker, which uses monthly CPS data to follow already-employed workers, is better at providing demographic context than measuring month-to-month rate shifts (since its calculations are all YoY three-month moving averages). As such, it is hard to know how to interpret the deceleration in nominal wage growth shown by the tracker over the past year. It may be influenced by the YoY higher rate of churn, which “resets” each worker’s wage growth rate when they change jobs and are rehired. If so, the recent decline in churn could move the tracker back up with a lag.
Overall, when looking at the breakdowns, the portrait is of a job market that transitioned most rapidly into higher gear back in 2014 and 2015—and that is still doing very well, but less so on a rate-of-change basis, today.
Job switchers ripped ahead of job stayers in 2016, but the edge has now dropped back a bit. The college-high school gap along with the high skill-low skill gap sank to its low point in 2015. (That helped give a powerful boost to the median-income family, along with plunging energy and food prices.) These gaps have since widened a bit, though they're still narrower than they were back in the dark days of the early recovery. Ditto with white-nonwhite and older workers versus youth. Nonwhite and young employees achieved their greatest relative gains in 2015 and 2016. Today, we’re seeing a bit of a relapse.
APPENDIX: EMPLOYMENT & WAGE GROWTH BY INDUSTRY
The main sectoral themes here are the recent jobs acceleration in goods-producing industries over services and the nongrowth in public-sector employment.
In the goods-producing sector, the fastest-growing industries are energy/mining and durable-goods manufacturing. In the services, the fastest-growing are business services, health, and leisure and hospitality. But services also include three industries whose workforces are actually shrinking YoY: media ("information"), retail, and utilities. In absolute numbers, media and retail are losing about 10,000 workers a month.
Understandably, retail now trails every other industry in YoY earnings growth (just 1.11% in November). Construction, transportation, finance, health, and leisure and hospitality currently show the fastest YoY earnings growth.
