March jobs report well below expectations, trade war trouble on the horizon

Economic forecasters expected another strong jobs report today. That didn’t happen. Steve Benen has the March jobs report. Following February’s highs, job growth slowed down in March:

The Bureau of Labor Statistics reported today that the economy added 103,000 jobs in March, while the unemployment rate held steady at 4.1% for the sixth consecutive month. In both cases, forecasts projected better progress, making today’s report disappointing.

Making matters slightly worse, the revisions for the two previous months – January and February – point to a combined loss of 50,000 jobs as compared to previous BLS reports.

As a rule, I’d recommend against over-interpreting anyone report. February’s totals, for example, were still excellent, and we’d need a lot more evidence before drawing any conclusions about a cooling job market. That said, Donald Trump and the White House have been running around telling people that 2018 was shaping up to be the strongest year for jobs “in more than two decades.” As of this morning, the first quarter of 2018 was the best for job creation since the first quarter of … 2015.

Here’s another chart, this one showing monthly job losses/gains in just the private sector since the start of the Great Recession.

Economist Jared Bernstein adds, March jobs: Topline miss but solid trend, plus a deeper dive into the current wage story:

Payrolls were up 103,000 last month, well below expectations for about 180,000, but this miss should not be taken to mean that the job market is in trouble. To the contrary, the trend of job growth remains strong and unemployment is at a 17-year low. Remember, these monthly data are noisy and you must average over numerous months to extract a meaningful trend—see “smoother” figure below. Consider, for an example of the monthly swings in these data, February’s gain, revised up now to 326,000 (the larger downward revision to January led to a decline of 50,000 from the combined previous reports of job gains in those months).

Wages, before inflation–a closely watched gauge of the extent to which the tightening job market is boosting workers’ bargaining clout–rose 0.3% in March, and 2.7% year-over-year, a slight bump over last month’s 2.6% rise. However, this is far from an inflationary number, and the production/non-supervisor wage was up only 2.4%, and that’s 80% of the workforce. (Yes, that implies outsized gains to higher-paid workers, but again, some of that is monthly noise.)

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Deeper wage dive

This month, we (Lexin Cai and I) dig a bit deeper into the wage story. Much wonkiness follows, but the punchline is that slow productivity growth poses a clear constraint on wage growth. However, there’s a lot more room for wage growth through labor clawing back some of its lost share of national income. Importantly, from the Fed’s perspective, that’s source of wage growth is non-inflationary.

As noted, nominal hourly wages rose 2.7% over the past year. For the 80% of the workforce in blue-collar, non-managerial jobs, wage growth was up 2.4%. The figures below show yearly wage growth since the downturn along with a smooth trend (a 6-month rolling average) for both series. After falling in the recession, nominal wages settled at about 2%, year-over-year, and, as unemployment fell further, which typically creates more pressure on wage growth, climbed to about 2.5%.

But, as the scatterplot below shows, they’ve essentially plateaued at that level, which the figure reveals to be somewhat unusual.

The figure plots yearly, nominal wage growth for blue-collar, non-supervisory workers (this data series goes back to 1964, far enough to enable this analysis) in every month that the unemployment rate was between 3.5-4.5 percent. The average wage growth in these months was about 4%, but as you see in the cluster we’ve circled, all the recent observations have been significantly lower than that, at around 2-2.5%.

What gives? Why is that cluster such an outlier?

First, there’s a bit of apples-to-oranges in this comparison. The demographics of the workforce, inflation, and most importantly, productivity growth–all of which influence wage growth–have all changed a lot over these years, such that even conditional on low unemployment, we’d expect different outcomes. I don’t think changing demographics is much of a determinant of this outcome. To some extent, pulling less skilled people into the job market may be putting some downward pressure on wage growth, but I’m sure low inflation and especially our current slow productivity growth are more consequential.

What you see in the figure are essential three different wage growth regimes at low unemployment. The top one—the dots clustered around 6%–occurred mostly in periods of very high inflation, like back in the 1970s, when big Paul Volcker shut down wage and price inflation with massive, recession-inducing interest rate increases.

The middle cluster partially reflects the strong wage growth of the full-employment latter 1990s, when much strong productivity growth (2.5% versus today’s 1%) helped pay for non-inflationary wage growth while enabling firms to maintain high profit margins.

The bottom cluster—the one we’re currently living through—reflects both low inflation and low productivity.

Does that mean workers, especially these middle-wage folks, must be resigned to being stuck in that bottom group of dots? No! Prices should, and to some extent are, rise some as the economy continues to tighten, and that could help push up nominal wage growth (though not real, since higher wages would be met with higher prices). The problem is slow productivity growth.

We don’t know much about how to get faster productivity growth, but there’s another path toward wage gains for these workers: redistribution from the inflated profit share of national income to the labor share. Under that scenario, very tight labor markets—I’m talking about the left side of this scatterplot—create the pressure for faster wage gains that shift income from profits to wages.

Yes, that crimps corporate profit margins and the stock market will hate it. But it is precisely the rebalancing that should occur in a truly full employment labor market. In fact, the absence of such a rebalancing is one signal that we’re not yet at full employment.

But wait! Weren’t the GOP tax cuts supposed to boost the economy? Philip Bump of the Washington Post explains, The tax cuts were supposed to be ‘rocket fuel’ for the economy. Since they passed, the markets are down.

“These massive tax cuts will be rocket fuel,” Trump said, “rocket fuel for the American economy.”

Trump’s favorite measure for the health of the economy over the course of 2017 was those same markets, which seemed as though they were never again going to go down. Until they did — about 40 days after that rocket-fuel bill was signed into law. In early February, the markets sank, kicking off what has been a prolonged stretch of volatility.

Between Trump’s inauguration and the signing of the tax cut bill, the Dow, S&P and Nasdaq had increased by 19.9 percent, 15.4 percent and 20.2 percent, respectively. After, through the market’s close on Monday, they had fallen by 1.9 percent, 2.2 percent and 2.7 percent.

They went back up Tuesday but were still down since Dec. 22. Between Sept. 11 and Dec. 22, the Dow, the S&P and Nasdaq rose 11 percent, 7 percent and 8 percent, respectively. During the same number of market days after the bill was signed, they were all down.

At close of market on Monday, each measure was off its 52-week high by at least 9 percent. Before the bill’s signing, none of those indexes had been down more than 3.7 percent off its 52-week high.

Between the signing of the bill and Monday, the indexes had been down on about 46 percent of market days.

What about those “trickle down” tax cuts that corporations would bestow on boosting working class Americans wages? Workers haven’t noticed it. Shock poll: Majority of Americans don’t see Trump tax cuts in paychecks:

A poll released this morning by CNBC’s All America Economic Survey, conducted by Hart Research Associates and Public Opinion Strategies in mid-March, found that only a third of the Americans have noticed more money in their paychecks because of $1.5 trillion Trump tax cuts. More than half — 52 percent — say they’ve seen no change at all.

The extra take home pay is so inconsequential to most people that, of the minority who says they’ve noticed the extra funds, a little less than 40 percent say it’s improved their finances “a great deal” or “a fair amount,” with the remainder saying it the money either helps a small amount or not at all.

Am I  surprised? Of course not! This was entirely predictable — despite Republican claims to the contrary last year.

The tax bill, as we all know, was a major gift to corporations and the wealthiest of the wealthy, who received the lion’s share of the $1.5 trillion cuts. The cuts the typical American received, on the other hand, are relatively minor.

The nonpartisan Tax Policy Center estimated that the typical middle-income household would see an after-tax gain of $930 in 2018 as a result of the new law. Assuming a one-paycheck household, that adds up to a little less than $18 a week. That’s enough for an extra lunch at Chipotle (average check: $12) but won’t even cover a steak dinner at Outback Steakhouse.

There is, unsurprisingly, a partisan divide in how the tax cut’s benefits are being perceived. While 52 percent of Republicans in the CNBC poll say they’ve noticed more money in their paychecks, only 20 percent of Democrats and 19 percent of independents claimed the same thing. Similarly, while 51 percent of those who approve of Trump say they noticed the change in their paychecks and attributed it to the tax cut, only 21 percent who don’t approve of his performance say the same.

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When Republicans were promoting this monster of a tax cut last year, they repeatedly claimed it would help middle-class Americans. Mnuchin argued the middle class would benefit, while the rich would receive “very little cuts or, in certain cases, increases.” This was laughably untrue. Some of the arguments verged into parody: Ivanka Trump claimed the plan would “create simplification” for Americans, a remarkable statement considering it was passed with so little deliberation that it’s now becoming clear a huge number of “errors and ambiguities” are causing problems for large and small businesses alike.

Republicans also argued voters would reward them come this November for the extra money in their paychecks.

Don’t count on it. Angry Voters Admit That They Aren’t Getting Raises From Tax Cuts.  This is why President Trump tossed his comments on the GOP tax cuts yesterday and returned to his race-baiting, fear mongering anti-immigrant hysteria to distract his mativist and racist MAGA base and keep them in check. Trump Unleashes Immigration Tirade at Tax Event (video).

Since the February jobs report, President Trump has launched his protectionist trade war, and that is going to have consequences beyond a volatile stock market. A Motley Start to 2018: Reviewing The First Quarter.

Trade wars always hit American agriculture the hardest, and (red state) farm state Republicans are worried. Republican senator on Trump’s latest tariff threat: ‘This is nuts’:

One Republican senator was quick to rip President Donald Trump over his plan announced late Thursday to seek an additional $100 billion in tariffs against Chinese goods.

“China is guilty of many things, but the President has no actual plan to win right now,” Sen. Ben Sasse, R-Neb., said in a statement.

“He’s threatening to light American agriculture on fire. Let’s absolutely take on Chinese bad behavior, but with a plan that punishes them instead of us. This is the dumbest possible way to do this,” he said.

Sasse’s home state of Nebraska could be particularly hard-hit by retaliatory Chinese tariffs against U.S. agricultural exports.

Earlier Thursday, Trump inflamed fears of a trade war with an announcement that he was seeking $100 billion in tariffs on top of the $50 billion already proposed for certain goods from China. Futures markets immediately slumped on fears that the move will make the already jittery stock market even more volatile.

Sasse wasn’t the only one to speak out Thursday against the new tariffs.

Dean Garfield, chief executive of the tech-industry lobbying group Information Technology Industry Council, called the new proposal “irresponsible and destabilizing.”

“We need the U.S and China to come to the table and identify solutions to these serious problems. We call on both sides to halt unproductive and escalatory rhetoric, recognizing that these words and actions have global consequences,” he said in a statement.

Richard Haass, president of the nonpartisan Council on Foreign Relations think tank, said in a series of tweets that Trump’s stance is “incoherent” and will “tank markets.”

“All new US tariffs will do is trigger new Chinese tariffs,” he said.