LIZ ANN SONDERS: Hi, everybody. Happy new year, and welcome to the January Market Snapshot.
These days, anything jobs related tends to capture a lot of headlines. And, certainly, the December Jobs Report, which came out last week, was yet another headline grabber. And I think labor market data is important in general, it’s always important, but especially these days in the context of this very heated inflation environment, which, of course, what goes on in the labor market, the tightness of the labor market, wage pressures is a feeder into inflation. So I wanted to spend some time today going through not just the details of this most recent Jobs Report, but some broader measures, and a look at the labor markets and wage pressures to put it in the context of this inflation problem, with which we’re all dealing these days.
Now, one of the first headlines that flashes when we get the monthly Jobs Report is the payroll number. That comes from a survey. It’s a survey of, you know, tens of thousands of companies simply about the number of folks that they have on their payroll. So it’s a pretty robust survey. A lot of companies are part of that survey. But there’s another measure. It’s also a survey, but it’s of household, and the unemployment rate is actually derived from this household survey. And it is literally a survey of households, and what that can sometimes pick up that the more standard or traditional payroll survey doesn’t pick up would be things like the self-employed, maybe folks that are household workers, folks maybe that moved into the gig economy. And that, especially these days, is important, because we have seen a lot of shifts like that, and helps to explain why in the case of the last couple of months, you see a significantly higher gain in household survey-driven jobs than you do in that traditional payroll survey, also helping to explain why the unemployment rate dropped as much as it did last month. And I will talk in a little more detail about the unemployment rate in a minute.
But the first thing I wanted to do is also take a look at the sector level. Now, I’m not talking about stock market sectors here. I’m talking about sectors in the economy and the way the Bureau of Labor statistics breaks this out, you can look at where job gains are most robust, maybe where job gains are weaker. And this continues a trend of leisure and hospitality being at or near the top of the list in terms of payroll gains. And that’s good news. The problem, more recently, is that those have started to come in less than they have during some of the most robust months for job creation. So, yes, it’s still the number one sector for job creation, but at only a little more than 50,000. That is well lower than what we’ve seen in some of those more robust months. So that’s something to keep an eye on.
On the other end of the spectrum, we see government in the losing position, but also retail trade had a little bit of a loss of payrolls in this most recent report. And that is maybe a budding sign that some of the consumption-related data in the economy, and we know how important consumer spending is in the US economy, could start to come under some pressure. So pay a lot of attention to the headline numbers. Understand the differences between the payroll survey and the household survey. But also dig a little deeper, because I think some of these sector level changes in payrolls will continue to be important in trying to get a fuller picture of the labor market situation.
Now, certainly, as a feeder into inflation are wage pressures. And, unfortunately, there’s a lot of ways that wages are measured. You can look at broad measures like unit labor costs or the employment cost index. Some of those incorporate not just traditional wages, but things like bonuses, or they might add benefits into the picture. Arguably, the most common metric that tracks wages is average hourly earnings, which is shown here. And that is the metric that is reported in conjunction with the monthly Jobs Report. And there’s nothing specifically wrong with this measure. I would just caveat it by saying that there are some problems that can occur when you have extreme mix shifts, which I’ll explain in a second, that can cause some real outliers in terms of some of these readings.
And before I explain exactly what those are, you can almost infer that just simply looking at the last couple of years on this chart, where you see an extreme move up. In fact, that peak in wage growth, so to speak, average hourly earnings at more than 8% was actually in April of 2020. Now, you might think, ‘Were wages really going up by about twice as much as they are right now during what was arguably the worst month in terms of the job market back during the worst phase of the pandemic?’ And, of course, the answer is no. But what was happening at that time is the vast majority of job losses in a month like that, where more than 20 million jobs were lost, were on the lower end of the wage spectrum. And inherent in a basic average is that you take a bunch of lower numbers out of the average, it biases the overall average higher. The opposite has happened more recently, where during some of these months where we’ve had incredibly strong payroll gains, again, those have been concentrated on the lower wage end of the spectrum. And that, as a result, caused this metric to move to the complete opposite direction. Now, we’ve normalized that a bit. Some of those mix shifts, so to speak, are to some degree in the rear view mirror. But I would argue that in addition to average measures, it’s important maybe to also look at median measures. So that’s what I’m going to show next here.
The Atlanta Fed on a monthly basis does something called a Wage Tracker, and it’s similar in terms of the data it’s trying to pick up, and gauge and measure with regard to wages, but they do it in median terms instead of in average terms. So the blue line represents the overall, and you can see it’s jumped to above 4%. That’s about in line with where average hourly earnings are, but as you can also see, without those huge swings that came by virtue of the simple way the math works in calculating an average.
But I also wanted to show something that I think is important. And that is that most, if not actually all of, more than all of this uptick in wage growth has been in the lowest earning quartile. So this, by no means, means we’re narrowing the wealth gap or the income gap, but the good news is, is those folks on the lower end of the wage spectrum are seeing the largest percentage increases in wages, actually versus a down trend for the highest earning quartile.
Now, I mentioned I would talk about the unemployment rate. Again, the household survey is where the unemployment rate is derived. And the blue line here is just the traditional, call it standard unemployment rate, which, as of the December report, dropped to under 4%, which is great news. We’re getting back close to where we were pre-pandemic. The other piece of good news is that we continue to see movement down in long-term unemployment. That’s the yellow line here. And you can see when we first started to see the big drops in the unemployment rate, after the worst part of the pandemic, there was a very delayed move in that long-term unemployment, and that’s folks who are unemployed for at least 27 weeks.
And it’s still more than 30%, but that’s down from about 42-, 43%. And that is one measure of what we think of as scarring, long-term scarring that can come from severe crises. So the good news is that is healing, to some degree, as well. So that’s just also something to keep in the back of your mind. Don’t focus just on the unemployment rate, but also keep in mind long-term unemployment, and our expectation is that we’ll continue to improve, along with continued improvement in the unemployment rate.
Now, one of the kind of sticky wickets with all of this labor market data has been the fairly, so far anyway, anemic pickup in labor force participation. The overall labor force participation rate is the blue line, the scale is on the left, and then prime age, which is folks between 25 and 54 years old, is on the right-hand side and that’s the yellow line. And you can see that, although we were well up off the pandemic era lows, we’re nowhere near back to pre- pandemic levels. And there’s myriad reasons for this. Some of it is secular. Some of it is demographics and Baby Boomers retiring, but some of it is more cyclical. Some of it is tied to the pandemic. And some of the reasons for this fairly low labor force participation rate are some of the same reasons why we also have a high quits rate, which I’ll get to in a minute. And some of that has to do with, ‘Well, you know what? My spouse is working. I don’t need to.’ Some of it relates to health concerns. Some of it is tied to the appreciation people have had in housing, in the stock market. So in many cases, there have been early retirement, because people have, to put it in kind of slang terms, hit their numbers sooner than expected. So we do expect the participation rate to continue to go up, but we do think it’s also going to be a while before we get back to those pre-pandemic levels.
Now, I mentioned the quits rate. This is tied into the kind of catchy terminology of the great resignation. And, overall, we’re still experiencing about a 3% quits rate, which means the last few months, about 3% of the workforce have quit their jobs on a monthly basis. What this chart looks at is a breakdown by sector, similar sectors to the labor market data that I showed before, and you can see whereas the job growth has been highest for leisure and hospitality, the quits rate has also been highest for leisure and hospitality. And consistent with job growth being weakest in government, the quits rate is also lowest in government. And what’s also interesting, and I think part of the reason for this high quits rate, and I don’t have a chart of this, but the Atlanta Fed, in addition to breaking out their wage tracker based on lower earners versus higher earners, which I did show, it is the case that job switchers have a much higher wage growth rate than job stayers. And I think that’s been an impetus for some of what we’re seeing here. There’s been that financial incentive to quit your job in the interest of maybe getting another one probably fairly quickly that pays at a higher rate. So this is something to keep a close eye on too. It helps to really further define the unique nature of the pandemic, but also the tightness in the labor market and why there is this increased pressure on wages.
Now, earlier this week, we got some additional data. It’s a monthly survey done by the NFIB, the National Federation of Independent Business, which surrounds small businesses, and this looks at their hiring plans. It’s a year-over-year changed, and you can see from the depths of the pandemic where hiring plans went deep into negative territory, even beyond global financial crisis era, and then coming out of the worst part of the pandemic, we saw that surge when we were in that major hiring mode. Since then, it’s been a bit more choppy, but the most recent move was back up into a pretty lofty territory, historically, as you can see, looking at this 21-or-so-year chart, where we’re close to, with the exception of that pandemic spike, we’re still at a very lofty level relative to anything we’ve seen over this span of time. So tightness in the labor market is likely to persist, at least based on this metric.
Another component of this monthly survey from the NFIB are about plans to raise prices and plans to raise worker compensation. So the blue line here shows plans to raise prices and the yellow line plans to raise worker compensation. Now, what’s interesting is there’s a higher percentage companies that plan to raise prices than the percentage of companies that plan to raise worker compensation. Now, that doesn’t mean that price increases will greatly exceed compensation increases, because this doesn’t go into the percent by which prices will be raised or compensation will be raised. But if we start to see a convergence in these lines, my guess is that the blue line would do some catching down to the yellow line, because we’re starting to see a little bit of an easing in early indicators of inflation, and that could mean that that blue line continues to tick lower. But any divergence with the blue line continuing to move higher would not probably sit well in terms of the overall inflation data, because it would suggest the compensation increases may not be keeping pace with price increases.
The last component that tends to get a lot of attention, especially if there’s big movement in this NFIB survey is a question that’s asked of all their members, ‘What’s your single most important problem?’ And, interestingly, quality of labor tied into that whole skills gap is still the number one answer that is given. But take a look at that yellow line. That’s inflation, which has just skyrocketed into the number two position from what had been low single-digit percent of companies that were saying it’s the biggest problem. You can look back in the financial crisis era, back in 2008 or so, the last time we saw a significant spike in inflation being a big problem. It was short-lived, because, in large part, that was related to the spike in oil prices, not a broad-based rise in inflation, and those came down fairly quickly. The hope, of course, is that we start to see some easing in pressure here, too, but that is now well into second place here. Also interesting, are the red and the green lines, perhaps because of the stalling in the Build Back Better plan, the fact that even if there is something, it’s likely to not have much in terms of tax increases, and that’s why inflation has been able to jump past those two areas.
So it’s bit of a quick outlook, or look at the labor market indicators. Again, we get the monthly Jobs Report, but a lot of this data comes out more frequently. I put all of it into the mix because it ties into the inflation problem with which we’re all dealing with right now. We expect the labor market to continue to be tight, but as I mentioned, we’re starting to see some nascent signs that the leading indicators for inflation are starting to ease. That would be great news, especially if compensation can stay relatively healthy and we don’t have to see so much of that eaten up by the cost of everyday living.
So I hope you enjoyed this video, as always, and we will be back in a month with another one, but thanks, as always, for tuning in.