Strong July Jobs Report

I usually post Steve Benen’s summary of the jobs report each month, but he is on vacation this week. I know! How dare he. Jared Bernstein at the Washington Post writes, Solid job market gains are nudging us towards full employment:

The job market just keeps on truckin’. Payrolls went up 255,000 last month, 292,000 the month before, and an average of around 200,000 jobs per month over the past year (May’s 24,000 blip was an outlier I’ll get back to in a moment). Unemployment remains low at 4.9 percent, even as labor market participation has ticked up slightly over the past few months, implying that people are entering the job market and finding work.

Importantly, as the job market tightens, workers’ bargaining power gets a boost, and we’re seeing wage growth tick up as in the figure below. Over the past year, nominal hourly pay is up 2.6 percent. Consumer inflation is up about 1 percent, meaning real wages are growing, too.

That inflation point may be most important, because it implies a Goldilocks story from the perspective of the Federal Reserve (“not too hot, not to cold”). We’re solidly on the path to full employment, but inflation remains “well-anchored,” in Federal-Reserve speak. If anything, the Fed has been missing its 2 percent target on its inflationary gauge of choice, as I show in the figure below.

The figure has four lines: the jobless rate, the Fed’s estimate of the “natural rate” — the lowest unemployment rate they believe to be consistent with stable inflation at their 2 percent target — and year-over-year wage and price growth (using the core-PCE deflator, which leaves out volatile oil and food prices).

The unemployment rate, at 4.9 percent, is about where the Fed sets its natural rate. Based on its underlying model of how these relationships work, that means inflation should be picking up. But it’s not. As noted, the Fed is still consistently missing the target by a long shot, as it has been for a long time.

To be clear, we’re not at full employment yet. The underemployment rate, a broader measure of labor-market slack which includes the almost 6 million part-time workers who would rather be full-timers, is a still-elevated 9.7 percent.

But at any rate, the figure shows the Goldilocks story: job growth is percolating at a solid clip, pushing down the jobless rate, and wage growth is picking up a bit, but there’s no evidence of overheating. This is not a job market begging for a rate hike to slow it down.

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[Y]ou really have to think about “confidence intervals,” or, as they’re often referred to in polling: margins of error. What these helpful numbers tell you is how confident you should be in the headline numbers from the reports. If the signal-to-noise ratio is strong, the confidence interval will be tight and the margin of error will be small.

For the monthly payroll numbers, the 90 percent confidence interval is 115,000. That means, for example, that in July, the U.S. Bureau of Labor Statistics estimates a 90 percent chance that the real number of jobs created was between 140,000 and 370,000. That’s the difference between a blah-if-not-worrisome jobs report and a pop-the-champagne-corks report. Yet what the numbers are telling us is that while 255,000 is our best guess, there’s a good chance that July’s gains could have been much weaker or stronger than that.

This is particularly important to keep in mind, as many analysts did, when you get an outlier month, like May’s 24,000 payroll gains, or from the other direction, June’s almost 300,000 jobs added. The best antidote for such noise is smoothing out the bips and bops by average over a number of months, as I do below, showing three-, six- and 12-month averages of monthly payroll gains.

The fact that each bar stands at about 200,000 is a good indicator of the underlying trend of monthly job growth. That’s a nice, round number that should help to keep nudging the job market toward full employment. And given the welcome presence of Ms. Goldilocks, it’s a number that doesn’t warrant any preemptive break-tapping by the Fed.

There has been a steady recovery over the past six years. There are pockets around the country that have not enjoyed as much of the recovery as the rest of the country — Arizona is a good example — but that has more to do with decisions being made at the state government level, not in Washington.

UPDATE: Jared Bernstein also writes, Economist Mark Zandi: Donald Trump is the biggest threat to the recovery:

If Mr. Trump gets precisely the policies he says he wants, then the economy will suffer a recession.

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[A]s I say in a recent paper assessing the economic impact of his proposals:

“The upshot of Mr. Trump’s economic policy positions under almost any scenario is that the U.S. economy will be more isolated and diminished.”