While the June US Employment Situation report is now 2 trading days old, we think it still bears analysis because the state of the US labor market is so critical to both Federal Reserve policy and the pace of future domestic economic growth. Our fundamental view on the post-Pandemic US job market recovery is one of measured optimism. A hot economy is not the only precondition needed for a full return to 2019 employment levels. We also need to see full re-openings in major US cities and a more complete return to pre-pandemic life. On top of those issues, there are also societal shifts underway.
Three points using the data from Friday’s jobs report to highlight these themes:
#1: Labor force participation – a tale of 2 generations. LFP is the percent of American adults who are either employed or looking for work. In January 2020, it stood at 63.4 percent. This was the highest level since January 2013. Many economists had given up on ever seeing LFP rise because of an aging US population, but a hot service economy in 2019 did just that.
This chart shows that history, as well as the fact that LFP has not really improved in the last 11 months.
But … Once you break down US labor force participation into demographic cohorts (25 – 54 and +55 years old) you see what’s really going on. Younger worker LFP (green line, left axis) is coming back at a decent clip (81.7 pct now, already at 2017 levels). Older worker participation (grey line, right axis) had a bounce on the initial reopening of the US economy in August 2020 but is now back to the May 2020 lows.
Takeaway: older Americans are exiting the labor force right in the middle of the 2021 US economy’s reopening surge. As long as that continues, overall labor force participation will not be able to recoup its pandemic-related decline. Fed Chair Powell often speaks about LFP as a measure of how inclusive/all-encompassing the post-pandemic labor market recovery truly is. This “tale of 2 demographic cohorts” shows there’s more to the story than that analysis shows.
#2: Speaking of Chair Powell, he often cites the gap between the number of jobs in February 2020 and the present day to quantify how much progress is still required. Here are those numbers, and how long we have before we fully close that gap:
- February 2020: 152,523,000 workers in the US economy
- June 2021: 145,759,000 workers
- Difference: 6,764,000 workers
- If the US labor market adds 850,000 jobs every month (June 2021’s job creation), it will take 8 more months before the job rolls equal February 2020 levels.
- If the labor market adds 542,000 jobs/month (2021 average), it will take 12 months to close the gap to February 2020.
Takeaway: our work on regional unemployment points to seeing this gap close over 12-18 months rather than the 8 months implied by June’s jobs report or even the 12 months assuming the 2021 average. Joblessness remains a problem in places like New York City (9.8 pct unemployment rate in May) and Los Angeles (10.1 pct), and that is a +12 month fix in both areas given the shifts in commutation, work arrangements, business and tourist travel since last year.
#3: Wage inflation – if not now, when? The labor shortage highlighted in the Job Openings and Labor Turnover Survey (JOLTS) reports and the Fed’s Beige Book had us braced for a hotter-than-expected wage print this month. Maybe, we thought, that would shake the 10-year Treasury out of its persistent move to lower yield levels.
But … No… June’s wage growth was good but, as this chart (2000 – present) shows, it’s no hotter on an annual growth basis than a typical “strong economy” print. At the end of the 1990s economic cycle, wages for production/nonsupervisory employees rose by +4.2 pct/year (highlight box, left side). It hit the same level in 2006 – 2007 and got close in October 2019 (3.8 percent). Moreover, we need to take that +3.7 percent June report with a grain of salt because the comps to 2020 are muddied by the unusual labor market conditions back then.
Takeaway: while some industries clearly must pay more to attract workers (leisure and hospitality, mostly), the aggregate US data does not currently show unusual levels of wage inflation. Yes, we’re in a much stronger than usual economic recovery so we’re seeing better than average wage growth for this part of the cycle. Once you look at the overall historical record, however, June 2021 looks remarkably unexceptional on this count. We’re not entirely dismissing the idea that wage inflation can run further, and will keep looking for signs that it will, but June’s report simply doesn’t fit that bill.