But the FOMC Needs to See Higher Inflation Before Hiking
The jobs report for January, which featured revisions because of BLS’s annual benchmarking, showed no slowdown in the labor market. The BLS reported that there was “no discernible impact” of the partial government shutdown on the establishment survey data, but that was not the case for the household survey. Payrolls increased 304K in January, and gains in previous months look strong even considering the December gain was marked down 90K. Monthly payroll gains have now averaged 232K over the last six months, a very strong pace at this point in the expansion.
Despite its strength, this report has no impact on the decision to pause in March. While this report adds to the evidence that the U.S. economy remains strong, it has diminished relevance for the June decision as well, given the emphasis Powell put on the inflation data as the primary factor that would motivate further tightening. A tight labor market would be a problem only if it results in unacceptably high inflation, which has been far from the case. It appears that now the entire FOMC has moved into the “show me the inflation” camp.
The story with respect to wages doesn’t appear to have changed much. Wages have firmed, but not to an extent that suggests excessive overheating. The 12-month change in average hourly earnings is 3.2%, which is what was reported to be in last month’s report. Average hourly earnings posted only a modest 0.11% increase in January, and there were modest upward revisions to the levels of average hourly earnings going back to February 2018.
The unemployment rate rose a tenth, to 4.0%, and the broader U-6 rate rose five-tenths, to 8.1%. We aren’t paying much attention to the household survey, which, unlike the establishment survey, was significantly impacted by the partial government shutdown. The number of unemployed who reported being on temporary layoff, a category which should include all furloughed federal employees, increased by 175K. However, BLS suggested that this understates the impact since it appears that some federal workers were erroneously recorded as employed but absent from work rather than unemployed on temporary layoff. The unemployment rate would have been slightly higher if not for this. Whatever the case, this is about a temporary impact, and it doesn’t have any bearing on monetary policy at the moment.
One part of the household survey that should not have been affected by the partial shutdown is the categorization of people as in the labor force. As such, the one-tenth rise in the participation rate in January is more meaningful than the unemployment statistics. It followed a two-tenth increase in December that had taken the labor force participation rate just above the 62.7%-63.0% range it had been in since October 2017. This latest increase provides some further support for the argument that there is somewhat more room to run in the labor market—a notion emphasized by Vice-Chair Clarida.