Tepid Wages, Participation Mute Celebration on U.S. Jobless Rate

(Bloomberg) -- The U.S. unemployment rate dipped below 4 percent for the first time in 17 years, but other details of the April jobs report kept any celebration in check.

Despite reports of firms struggling to find skilled workers, average hourly earnings showed a deceleration, rising 0.1 percent from the prior month and 2.6 percent from a year earlier, both less than forecast. Meanwhile, the participation rate slipped 0.1 percentage point to 62.8 percent, erasing part of an outsize gain from February that had indicated workers were being pulled in from the sidelines, Labor Department figures showed Friday.

Federal Reserve officials are likely to look beyond the modest wage gains and stick to a path of gradual interest-rate hikes, while economists generally see the data as in line with a solid U.S. jobs picture that supports an eventual acceleration in wage growth. At the same time, some of the details indicate that the labor market, while growing, isn’t tight enough yet to spur inflation -- in other words, where it’s been for much of the expansion that began in 2009. And that could also be a warning sign about growth.

“It’s a ‘Groundhog Day’ kind of employment report,” said Michael Gapen, chief U.S. economist at Barclays Plc, referring to the film where actor Bill Murray’s character must re-live the same day over and over. “It’s basically the same report we’ve had for the last five years, which in the past has been viewed unambiguously as good news. But my message to clients now is the more we get that kind of report going forward, the more I’m going to think we’re closer to the end of the cycle.”

While markets initially took the headline number of 164,000 job gains as a negative, stocks and bond yields since recovered, as February and March were revised up by a combined 30,000 positions. The unemployment rate fell to 3.9 percent, the lowest since 2000, from 4.1 percent, a point that President Donald Trump was quick to tweet. Black unemployment was the lowest on record and for women, it was the lowest since 2000.

Even with the unemployment rate drifting further below Fed officials’ estimates of levels sustainable in the long run, the report didn’t indicate fresh upward pressure yet on wages and inflation. Still, the data will probably keep the central bank on track to raise interest rates in June for the second time this year and once or twice more after that in 2018.

Tepid Wages, Participation Mute Celebration on U.S. Jobless Rate

“I don’t think this report changes anything with the Fed," said Harm Bandholz, chief U.S. economist at UniCredit Bank AG. Expectations are that the central bankers will hike interest rates three more times this year. “It’s a tight labor market, and it’s a tide that’s now lifting everyone. Those with the least qualifications are being lifted the last, but now that the labor market is that tight, it’s happening.”

The results may also reinforce forecasts for a rebound in economic growth this quarter after a slowdown in the first three months of the year, with the labor market supporting gains in consumer spending that may be further fueled by tax cuts. Companies in industries from services to manufacturing are hungry for workers, indicating hiring is likely to stay solid.

What Our Economists Say

The continuing decline in unemployment amid tepid wage pressures serves as a stark signal to labor economists, and Fed policy makers, that the neutral level of the unemployment rate, or NAIRU, is considerably lower than in the past several economic cycles—and furthermore, is likely lower than the Fed estimated as of the March Summary of Economic Projections (4.5 percent). Continuing a trend that has been present for much of this cycle, policy makers are likely to further reduce their estimate of the longer-run unemployment rate in the near term.

-- Carl Riccadonna and Niraj Shah, Bloomberg Economics 

The decline in the jobless rate resulted from a drop in the number of unemployed people, while the number of employed Americans was little changed.

Tepid Wages, Participation Mute Celebration on U.S. Jobless Rate

That pushed down the participation rate, or share of working-age people in the labor force. For prime-age workers, or people in the age group of 25 to 54, it dipped to 82 percent from 82.1 percent, led by a drop among women. The employment-population ratio, another broad measure of labor-market health, fell to 60.3 percent from 60.4 percent.

For Alan Krueger, former chairman of the Council of Economic Advisers under President Barack Obama, the weaker participation rate “suggests we are going to hit some speed bumps when it comes to expansion.”

“Sooner or later, we’re going to be running out of workers if the recovery continues, and that will put more upward pressure on wages,” Krueger, a Princeton University professor, said on Bloomberg Television.

©2018 Bloomberg L.P.