An Impressive Turnaround in U.S. Manufacturing Employment

by: Cliff Waldman, Chief Economist

If you were worried about a U.S. economic stall because of the weak first quarter GDP report, you should find some relief in the April jobs data. While the March payroll jobs number remains well below trend, there were 211,000 net payroll jobs added in April, consistent with the healthy gains seen in January and February. Supporting the picture of positive labor market momentum, the drop of 698,000 people working part-time for economic reasons is a sign of broad strengthening which may help the low labor force participation rate.

The sector-specific jobs numbers draw a picture of routs finished and routs started. With the 6,000 new factory-sector jobs in April, manufacturing employment has now increased for five consecutive months, with an average of 14,200 new jobs gained per month. This is an impressive turnaround from a particularly weak period. Overall, this is the most convincing evidence that the broad manufacturing picture is starting to show some real improvement from years of weakness. Modestly stronger global growth goes a long way for the U.S. manufacturing sector. 

However, significant change is always a fact of economic advancement. The rout in the retail sector, born of long simmering forces gravitating retail trade toward a new supply and sales model, is a risk for the overall employment picture. Happily, things calmed in April as retail added 6,300 jobs, but this was after employment losses totaling 56,000 in February and March. Forecasters need to keep an eye on this ongoing story.

The gap between weak GDP and relatively strong jobs is, of course, due to the productivity problem. The report for the first quarter of 2017 was awful-showing an actual drop in productivity. This is an actual worldwide problem (not a data issue), and it needs attention if U.S. economic growth is ever going to exceed 2%. Down the road, persistently weak productivity performance will adversely affect economic growth, profits, the quality of jobs created, and wages.

For now, the U.S. jobs picture remains fundamentally positive in spite of a low participation rate, as the memory of difficult years clearly begins to fade.

JobsErin Graziani
Fed Holds Rates, Signaling Caution on Outlook

by: Cliff Waldman, Chief Economist 

Stating “near-term risks to the economic outlook appear roughly balanced,” the Federal Open Market Committee (FOMC) elected to keep the target range for its influential federal funds rate between 0.75% and 1%, after a 25 basis point hike at the March meeting. The paradigm of caution that has guided monetary policy since the end of the deep 2008-2009 recession clearly remains in place, even as financial markets expect further monetary tightening as soon as June.

Amidst the Fed’s balanced assessment on the outlook, contradictions and complexities abound. This is due to the unknowns of short-term economic data, and partially due to the unpredictable nature of post-economic crisis years. U.S. GDP growth slowed to a paltry 0.7% during the first quarter of 2017. However, it was partially due to a slowdown in consumer spending that could have been a correction from outsized activity in recent quarters. In the same report, we learned not only of a much-needed acceleration in business fixed investment activity but also of an improvement in export growth. This adds to mounting evidence that U.S. manufacturing is finally seeing somewhat better days after years of economic weakness.

The greater complexity for the outlook and conduct of monetary policy, however, comes in the understandably strained effort to make sense of the labor market. The labor market appears to be at full employment, coexisting with an inflation rate that is still not convincing the FOMC that it has crossed the much-desired 2% level. The large body of research flagging the importance of the 2% inflation rate is clearly influencing monetary policy thinking. The intervening factor is the labor force participation rate. It is simply incorrect to argue that the U.S. labor market has reached a the unemployment rate that is roughly consistent with full employment (below which accelerating inflation becomes a problem), when the participation rate, in spite of very modest firming indicators in recent months, remains at a near four-decade low. If the U.S. had anything even close to a historically normal labor force participation rate, the unemployment rate would be measurably above its current level, and not many would argue that we have reached full employment yet.

Further constraining aggressive monetary action, the Fed, like many other major central banks, is jaded by the uncertainty of recovery from a near financial collapse that followed years of damaging deflation threatening the U.S. and global outlooks. Apart from the data and the research, a gut level sense of concern is not going to leave our skilled monetary policymakers just yet, even as the world shows signs of better days to come.

Financial markets will get their expected interest rate hikes. But they will get them slowly and in fits and starts. Like so many things in the wake of the epic events of 2008 and 2009, monetary policy is different this time.