By Paul Gomme and Peter Rupert
The US economy once again fools forecasters. The BLS announced that payroll employment increased 353,000 in January, with 317,000 added to private payrolls…about twice the Dow Jones prediction. In addition, December employment was revised up 117,000 and November up 9,000. Overall, growth was pretty widespread as the diffusion index (percent of industries increasing employment plus one-half of those with unchanged employment) rose from 64.0% to 65.6%.
However, not all in the report was good news. Average hours worked plunged to 34.1 from 34.4. Outside of the pandemic months, the 34.1 reading was the lowest since coming out of the Great Recession. The drop in average hours in combination with the 317,000 lead to a 4.1% decline in total hours of work.
The unemployment rate dipped from 3.74% to 3.66%.
January 30: Jolts
The Job Openings and Labor Turnover Summary (JOLTS) for December was released on Tuesday. The number of job openings increased slightly from 8.925 million to 9.026 million. New hires increased to 5.621 million and separations declined to 5.365 million. Moreover, there are still about 3 million more job openings than unemployed job searchers.
The Beveridge Curve, plotting vacancy rates against unemployment rates, also shows a very strong labor market. As the vacancy rate has declined over the past year or so, the unemployment has barely moved. Consequently, the recent combinations of vacancies and unemployment have been moving down towards the post-Great Recession Beveridge curve.
January 31: Employment Cost Index
The employment cost index rose 3.5% in the third quarter of 2023 at a seasonally adjusted annual rate. The ECI growth rate has declined by 2 percentage points since Q1 of 2022.
Our trend measure of core PCE price index is sitting around 2%, meaning that the real ECI has risen about 1.5%.
February 1: Productivity and Costs
Productivity (real output per hour) increased 3.2% in Q4 at a seasonally adjusted annual rate. Output increased 3.7% while hours worked increased 0.4%.
Putting together the ECI and Productivity Numbers
One way to think through these numbers is that when worker costs grow faster than the revenue they bring in, profits (or capital returns) get squeezed. For the final quarter of 2023, nominal employee costs rose 3.5% while real labor productivity grew 3.2%. However, we also need to account for the effects of inflation: the ECI is a nominal variable expressed in current dollars while labor productivity is a real variable expressed in constant’ dollars. Using recent trend core PCE inflation (around 2%) then tells us that per worker revenue rose around 5.3% while employee costs `only’ grew 3.5%. In other words, the recent data implies that capital income (per worker) is actually growing.
Final thoughts
Taken together, the economy is still humming along and inflation has been falling. The decline in hours worked throws a little cold water on the reports, however. Those hoping for cuts in the Fed funds rate may have to wait.
