The monthly Employment Situation Report for April from the Bureau of Labor Statistics was followed up by a deluge of press coverage. How can you make sense of the data itself, let alone the cacophony in the press? We have three key takeaways for you:
1) A tightening labor market doesn’t seem to be sparking inflation.
The overall unemployment rate plunged to 6.3 percent in April from 6.7 percent in March. Economists agree that the unemployment rate affects inflation, but they disagree about the nature of that relationship. The Fed estimates the lowest the unemployment rate can go without causing accelerating inflation is about 5.5 percent. But a recent flurry of research suggests it’s the short-term unemployment rate, covering workers unemployed for fewer than six months, that affects inflation, because those out of a job for longer than six months are on the “margins” of the labor market.
That short-term rate fell to 4.1 percent in April from 4.3 percent in March. It has been falling steadily since the end of the recession, and it’s quickly closing in on the pre-recession low of 3.7 percent. Does that mean we should be bracing for a surge in wages, with inflation hot on its heels? Perhaps not: Earlier this week, the employment cost index was reported up only 1.8 percent compared to a year ago in the first quarter, slowing from a 2.0 percent pace in the fourth quarter. For the last four years, the index has been pretty rock solid, wobbling in a tight range between 1.7 and 2.0 percent. No upward pressure there. Meanwhile, the core PCE price index—one of the Fed’s key inflation measures—rose just 1.2 percent compared to a year ago in March. That’s up slightly from 1.1 percent in January and February but far from the 2.4 percent peak pace seen before the recession.
The short-term unemployment rate may have been a better guide to inflation pressures than the overall unemployment rate in the past, but a seemingly rock-bottom short-term rate now isn’t lighting any fires under wages or prices.
2) There may not be any hidden slack in the labor market.
Perhaps we’re not seeing bigger wage gains as unemployment falls because there’s still a lot of “slack” in the labor market. That has been Fed Chair Yellen’s view—you can see our updated “Dashboard” of her key labor market indicators here.
One of Yellen’s theories is that the deep recession caused many unemployed workers to drop out of the labor force altogether. If that’s correct, we should see the labor force participation rate rebound as the economy recovers. But that may be wishful thinking. The participation rate has been declining steadily since the end of the recession, from 65.2 percent in January 2010 to just 62.8 percent in April. While it seemed to have stabilized earlier this year, it ticked down again in April by nearly half a percentage point. That’s the main reason for the big drop in the unemployment rate in April.
As we have been discussing in our Business Cycle Conditions report, the economy is on a slow-but-steady recovery path. Perhaps it’s unwise to expect any big swings in labor market trends this far into the recovery.
3) Noisy data affect perceptions, but so do revisions.
Along with new data showing a smoking 288,000 gain in non-farm payrolls in April, today’s report included a total of 36,000 in upward revisions to the March and April numbers, to 203,000 and 222,000 respectively. Revisions so far this year have netted a 30,000 gain compared to initially reported results. Last year, net revisions resulted in a 31,000 gain, on average.
The New York Times yesterday ran a compelling bit of analysis that illustrates why people shouldn’t get worked up over month-to-month changes in payrolls, which are mostly just “noise.” But you should also keep in mind that the payrolls numbers we see today will definitely not be the numbers we’re looking at next month, or a year from now.
Our animated chart below shows the initially reported payrolls data over the last year versus the latest reported numbers. Animation may take a few seconds to load.