This past Friday, the Bureau of Labor Statistics released its updated employment situation for February 2015. And while I was busy all day driving back from South Carolina, economists were busy all day analyzing the report. The general consensus was that the seasonally adjusted 295,000 jobs added and reported 5.5% unemployment rate indicates that there is full steam ahead for the labor market. However, as I have previously written, the true story of labor market slack is in wage growth. Once again, this jobs report included dismal real wage growth, with a slow down to 2% annual wage growth from 2.2% in January. While this headline may give pause for concern, further analysis reveals that wage growth may not be as bad as once thought. Given this employment situation, the Fed is perfectly placed to begin monetary policy tightening.
The story of wage growth is one of the last few indicators for labor market slack, and this labor report indicates that this story has only worsened. However, looking deeper into the numbers provided can paint a more positive picture of the labor situation. As explained by the chief economist at OppenheimerFunds Jerry Webman to The Street, the use of an average hourly wage can skew wage data. He explains:
"It's hourly earnings, so it's not everyone in the labor force," said Jerry Webman, chief economist at OppenehimerFunds. "Secondly, it's very much affected by who gets jobs as opposed to who doesn't get jobs...So it's not as if people are making less--it has something to do with the share of jobs we did create."The use of this hourly wage number can be skewed as those who are entering the labor force, who may be hired in lower paying jobs due to lack of experience or lack of high paying job openings, will drag down the headline number. This average number can hide the growth in wages that have remained in the labor market over comparison periods, something that could show the true change in wage growth and give a better picture of the labor market. Factoring out these lower wage, new hires, should result in a greater overall wage growth for those who have been employed for a longer time period.
With the last factor of labor market slack seemingly not as bad as once reported, the Fed has signaled that they will be taking their foot off the stimulus gas. With the labor market now within the Fed described 5.2% to 5.5% range of natural unemployment rate, the Fed has cleared one of its last hurdles in beginning to raise interest rates. This final confirmation of expected monetary tightening sent a shock through financial markets after the report was released. As described in the WSJ Article Brisk Jobs Growth Puts Focus on Fed, equity markets and bond markets slumped following the Friday data release:
The prospect of Fed action jolted investors Friday, pushing stocks down and bond yields up sharply. The Dow Jones Industrial Average slid 278.94 points, or 1.5%, to 17856.78. The 10-year Treasury yield rose to 2.239%.It is interesting to note that this jobs report seemed to be the final nail in the coffin for those investors holding out that the Fed would delay raising rates. It had been mostly expected that the Fed would begin to tighten its monetary stance during Summer 2015, and this jobs report only solidified this expectation further. It is clear that while the interest rate increase is largely factored into the market, when the Fed does decide to make its monetary move it will likely be a jittery time in financial markets as investors continue to adjust to ever changing interest rate environments.
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