According to the Establishment Survey from the Bureau of Labor Statistics , employment increased by 236 thousand in March 2023. While this increase is the smallest thus far for 2023, it’s close to the average for the second half of 2022. The BLS also revised the change in employment for February up from 311 thousand to 326 thousand, and revised its reading for January down from 504 thousand to 472 thousand.
The BLS also reported that even though employment was up, average weekly hours were down, so that total hours worked fell 6.8 million hours in March which follows on the heels of a 4.1 million hour decline in February. The chart below shows considerable variation in the change in hours worked.
Private sector employment was up 189,000 and the government sector added 47,000 jobs. The private service sector added 196,000 jobs while the goods producing sector shed 7,000 workers. The largest gain in the service sector came from Leisure and Hospitality, adding 72,000 jobs.
Commentators have noted the decline in average hourly earnings, down 4.24% compared to March of 2022. This has been portrayed as a positive development for policymakers. The reason for this positive portrayal is that if higher inflation expectations become entrenched, then workers will want higher wages (to compensate for the higher inflation) which may lead to wage-price spiral in which wage increases feed to price increases which, in turn, feed into further wage increases, and so on. However, as with our commentary on inflation, year-over-year wage changes (the ones discussed by commentators) are slow to pick up changes in trend. And, as with annualized monthly inflation rates, month-to-month changes in average hourly earnings can be quite noisy; indeed, the annualized percentage change over the month actually rose 3.3% compared to 2.5% for the previous month. A 3 month average of monthly earnings growth smooths out some of the monthly fluctuations while, at the same time, picking up changes in trend in a timely fashion.
Readers of this blog know that inflation has generally been running higher than earnings growth. In previous posts, we have plotted average hourly earnings along side various price levels. Here, instead, we present real average hourly earnings: earnings divided by measures of the general price level. So that these measures are all comparable, we divide the consumer price index (CPI) by its average for 2012. The choice of 2012 is motivated by the fact the personal consumption expenditures (PCE) price index is already set to equal 100 in 2012. The chart below expresses average hourly earnings in 2012 dollars. Both CPI measures exhibit declines since 2021: For the overall CPI, average hourly earnings have declined by roughly $1 per hour, while core CPI records a decline of $0.42 per hour. Alternatively, using the PCE price index, earnings fell by $0.36 per hour; using the Fed’s favorite price index, core PCE, earnings have been essentially flat since the start of 2021.
The Household Survey from the BLS showed a 577,000 increase in employment. Moreover, the labor force, the participation rate and the employment to population ratio all increased. The unemployment rate fell from 3.57% to 3.50%. The Jobs Opening and Labor Turnover Survey still shows significant job openings even though they have come down some over the last few months.
Overall, the employment report shows a still-strong labor market, albeit there are signs of slowing in some areas. The Fed seems to have calmed inflation at this point and, depending on what unfolds over the next month or two, there may be a pause in raising rates since monetary policy tends to work with a lag.
The specter of inflation has received considerable attention over the past year. Indeed, the Fed’s increases in its target for the Federal funds rate have been couched in terms of reducing inflation. The Fed’s aggressive increases are likely geared to avoiding an increase in inflation expectations. When will the Fed know it has done enough?
Headline CPI (Consumer Price Index) inflation, based on year-over-year changes in the CPI, has remained well above the Fed’s stated 2% inflation target since early 2021. However, as shown in the chart below, annualized monthly inflation rates were running above target starting in late 2020. This figure illustrates some of the problems associated with looking at annual inflation rates: they are slow at picking up changes in trend. That said, monthly inflation rates are quite volatile as can be seen in mid-2022. In a sense, what we would like is to draw a line free-hand through the monthly inflation rates. The chart below shows that annualized inflation rates over a 3 or 4 month horizon do pretty well in responding reasonably quickly to the ups and downs of the monthly inflation series, while at the same time exhibiting less volatility relative to the monthly series. The 6 month annualized inflation rate suffers the same problem as the year-over-year measure: too much of a lag in following the monthly inflation rate up and down.
So, while monthly inflation rates were pretty much on target by late 2022 (the grey line is at 2%), the 3-month inflation rate was still running above target. In the first two months of 2023, monthly inflation has, again, risen above target; the 3-month average “sees through” these fluctuations. The graph below removes the 4 and 6 month lines to make it a little clearer.
In broad terms, core CPI (that is, excluding food and energy prices) inflation tells the same story: the annual inflation rate took a considerable period of time to reflect the increase in the monthly inflation rate. Roughly speaking, the trend for monthly core CPI inflation has been flat at 5.6% since the start of 2021. Again, the 3-month average core CPI inflation rate presents a nice compromise between smoothing out the month-to-month changes in inflation, and the over-smoothing associated with the annual inflation rate.
The usual motive for looking at core inflation is that removing the volatile food and energy components gives a better measure of trend inflation. Comparing the two charts above, it is difficult to see that core CPI inflation is, in fact, a good measure of the trend in overall CPI inflation.
Those attuned to monetary policy know that the Fed’s preferred measure of inflation is based on the Personal Consumption Expenditure (PCE) price index. Keep in mind that the PCE is only available until January 2023; the February numbers will be available much later this month. The chart below shows that this measure of inflation poked above the Fed’s 2% target early in 2021, and has pretty much stayed there. Once again, the annual inflation rate lagged behind the monthly inflation rate trend; the 3-month inflation rate smooths out many of the wiggles in the monthly inflation rate while responding reasonably quickly to changes in trend.
So, why is this such a big issue? There are some obvious and maybe not so obvious reasons. The most obvious reason for the fight against inflation concerns the purchasing power of a dollar. Inflation erodes nominal earnings. The easiest way to see this is to compare year-over-year changes in the CPI to year-over-year changes in nominal average hourly earnings. In the graph below, the red line plots CPI year-over-year inflation and the blue line plots year-over-year changes in average hourly earnings. When the red CPI line is higher than the blue average hourly earnings line, it means real earnings are falling…an hour of work buys fewer goods and services since prices grew faster than wages. Real wages rise when the blue average hourly earnings line is above the red CPI line. Starting in 2010 until the pandemic, average hourly earnings were growing between 2 and 3%; however, inflation was lower than that and so real earning were rising. After the pandemic, average hourly earnings were growing in the 5-6% range, the fastest growth in a decade, yet real earnings started to fall due to the higher level of inflation. At the height of inflation in mid 2022 (around 9% inflation) real earnings were falling by about 4% since the growth in wages was about 5.4%.
The chart above shows that sometimes workers “win” (earnings growth exceeds inflation), and sometimes they “lose” (earnings growth does not keep up with inflation). What’s relevant is whether workers tend to win more than they lose. To see this, the chart below plots average hourly earnings against two price levels, the CPI and the PCE deflator. All three series are set to 100 at the onset of the pandemic, and are measured in logarithms. There are two practical consequences of using logarithms: (1) straight lines represent constant growth rates, and (2) a constant gap between any two lines represents a constant percent difference between the two. This chart shows that real earnings rose during and after the pandemic: the blue earnings line rose above both of the price indices. No doubt, some of the rise in average hourly earnings early in the pandemic reflected the fact that job losses were concentrated among lower wage workers. Starting in mid-2021, CPI inflation started rising, and the red CPI line exhibits faster growth than the blue earnings line. By mid-2022, the red CPI line passed above the blue earnings line. Since then, average earnings have more-or-less tracked the CPI. By this metric, real earnings are more-or-less back to where they were prior to the pandemic. Notice that when earnings are measured against the PCE price deflator, real earnings are higher now than at the start of the pandemic: the blue earnings line is above the green PCE deflator line.
The next chart gives a longer view of earnings and prices. Now, earnings and prices are set to 100 in early 2006. During the Great Recession, real earnings fell: the red CPI line rose above the blue earnings line. Since then, the blue earnings line consistently exceeds either of the price lines reflecting an increase in real earnings since 2006. However, remember that the gap between earnings and, say, the CPI represents the percentage difference between earnings and prices. With this in mind, after 2010, the gap between earnings and the CPI shrank: real earnings fell relative to 2010. Starting in 2014, a growing gap emerged between earnings and the CPI reflecting increases in real earnings. So, while the chart above indicates that real earnings are back to where they were 3 years ago, over the past 15 years, real earnings have risen.
Inflation, however, does not affect everyone equally. For example, lower income individuals have by way of net wealth. Hand-to-mouth consumers suffer when the prices of the goods they buy rise at a faster clip than their incomes. Those with higher incomes also, typically, have positive net worth. Not only can they buffer their consumption against fluctuations in their real incomes, they also have access to investment opportunities that tend to protect their wealth, and so investment income, from the ravages of inflation. These investment opportunities range from interest-bearing bank accounts to the stock market.
The outcome of the March 21-22 FOMC meeting was a 25 basis point increase in the Fed Funds rate:
Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent.
We are not seeing a lot in this employment report to warrant any large changes in beliefs about the current stance of the labor market. The headline number in the Establishment Survey showed a gain of 311,000, solid, but not remarkable. There were gains in: (1) leisure and hospitality (105,000), (2) retail trade (50,000), (3) government (46,000, of which 37,000 is local government) and (4) health care (44,000). It also mentions losses in: (1) information (25,000), and (2) transportation and warehousing (22,000). It also notes that the information sector has shed 54,000 jobs since November of 2022. There were 25,000 jobs lost in the information sector in February, 9,000 of which were in the Motion Picture and Sound Recording Industry, and 3,000 were in Telecommunications.
Throwing a little cold water on the report were sizable downward revisions to the Establishment Survey employment gains for December (down 21,000 to 239,000) and January (down 13,000 to 504,000). The figure below gives a historical perspective on the first (initial) release, the second (revised) release, and the third (final) release.
In addition to the downward revisions, average weekly hours (private non-farm payroll) are down 0.1 hours, to 34.5. However, average weekly hours are still “high” by (recent) historical standards. Having said that, the combination of the rise in employment with the decline in average hours led to an overall decline in total hours of work by about 4 million, or 1%.
Average hourly earnings were up $0.08 and up about 4.6% year over year. However, CPI inflation continues to erode real average earnings.
The Household Survey showed that the number of people unemployed (up 242,000) and the unemployment rate (from 3.43% to 3.57%) rose. The labor force expanded by 419,000, moving the labor force participation rate to 62.5%. All groups except for teens have been trending up slightly since the end of the pandemic.
Overall, the labor market remains one of the strongest in recent memory. Not only is employment growing at a solid pace, the number of job vacancies has stayed substantially higher than the number of people unemployed and is unprecedented since these data began at the end of 2000. The relationship between vacancies and unemployment, known as the Beveridge Curve, has had a strange journey due to the pandemic. During the Great Recession the unemployment rate increased substantially as vacancies continued to decline. The “counterclockwise” pattern, standard in the search and matching framework, saw a reduction in the unemployment rate as vacancies began to increase. The unprecedented closures to business at the onset of the pandemic drove the unemployment rate to 15% even though vacancies did not decline substantially. Today, vacancies are near an all time high and unemployment near an all time low.
