How Sustainable is Today’s Job Growth? What to Look for in Friday’s Jobs Report

The U.S. labor market today is running red-hot. The latest numbers on jobs and unemployment are due out Friday from the federal government -- what should we be watching for in the March jobs report?  

• 195,000 new jobs added to nonfarm payrolls.

• Unemployment rate steady at 4.7 percent.

• Average hourly wages up 2.8 percent from one year ago.

• Labor force participation rate steady at 63.0 percent.

It’s been almost eight years since the last recession. But rather than running out of steam, the labor market has picked up momentum in 2017. So far this year the economy has added 237,000 jobs on average per month -- a pace above most economists’ expectations and well above last year’s pace of 187,000 jobs per month. Across the board, essentially every measure of the U.S. labor market today is positive, including:

• Job openings: U.S. employers are hiring for 5.63 million jobs as of January. That’s a huge number of vacant positions, just shy of the all-time record 5.97 million open jobs of July 2016. Despite growing policy uncertainty on health care, taxes, trade, environmental regulations and immigration from Washington, D.C., American businesses, we have seen no signs of a slowdown in hiring.

• Wage growth: The economy hits “full employment” when the unemployment rate dips below 5 percent according to most Fed economists. With unemployment at 4.7 percent, wage gains are clearly accelerating. Glassdoor Local Pay Reports show median base pay for full-time workers was up 3.0 percent YOY in March, tied with January for the fastest pace in the past three years.  

• Consumer confidence: American consumers are optimistic about the economy today. In March, the index of consumer sentiment from the University of Michigan was up a whopping 12 percent from before the presidential election in October 2016. Although it’s worth noting that consumer sentiment today is highly polarized, with most Democrats in the Michigan survey bracing for a severe recession, while most Republicans say they expect an era of robust growth.

• New unemployment claims: New claims for unemployment insurance are the closest thing we have to a real-time pulse on the labor market from the federal government. The latest figures show just 261,000 Americans filed for unemployment during the week ending March 18, near historic lows and well below the 300,000 threshold most experts use as a rule of thumb for a healthy job market.

While this is good news for workers and employers, many economists are wondering how long today’s booming job market can last. How sustainable is today’s breakneck pace of job growth? Hitting the Economy’s “Speed Limit” There is a natural limit on how fast jobs can ever grow in an economy. Adding each new job requires finding a worker who’s willing and able to take it. Once we hit full employment -- where we are today -- continued job gains are ultimately limited by how fast the labor force is growing. That’s determined by population growth, and what economists call the “labor force participation rate” -- the fraction of the population that’s in the workforce, and not young, retired, in school, disabled or otherwise not working. Today, economists estimate the number of jobs the economy needs to create each month to fully employ every worker joining the labor force is about 50,000 to 110,000 jobs. This is known as the “break even” pace of job growth. If the economy adds more job than this, the unemployment rate will tend to fall. If it creates fewer, the unemployment rate will rise. This means the U.S. economy has a theoretical “speed limit.” If we’ve hit full employment -- meaning the unemployment rate can’t fall much more -- we should expect job growth to eventually slow to the “break even” pace of 110,000 new jobs or less per month. If the economy continues adding jobs beyond that pace, there is growing risk of overheating the labor market, sparking the kind of inflationary pressures that keep Federal Reserve policymakers up at night. Today, jobs are being added well beyond this “break even” pace. And most economists expect more of the same in 2017. That means the U.S. unemployment rate is almost certain to continue falling below today’s 4.7 percent rate, dipping into territory most economists think is not sustainable long term. How Many Jobs in March? A quick way to estimate job growth is to compare recent job gains to the size of the labor force. With the economy near full employment, job gains can’t stray too far from the number of workers who are available to work. Below is a chart of monthly gains in non-farm payrolls as a percentage of the U.S. labor force since mid-2015. This ratio has hovered in a narrow band ranging from about 0.05 percent to 0.20 percent. Over the last six months it has averaged 0.12 percent with a standard deviation of 0.03 percent. Unless there has been a dramatic shift in the economy, we should expect that pace to continue in March. Monthly Jobs Gains As a Percentage of the Labor Force Don’t Vary Much That puts a rough boundary on how many jobs we should expect in the March jobs report, as follows: The U.S. labor force was about 160,056,000 in February, and has been growing at 91,000 workers per month over the past six months. That means we should expect a labor force of about 160,147,000 in March. Putting that together with the average ratio of jobs gains to the labor force above, we should expect about (0.12 percent) x (160,147,000) = 195,000 jobs added in March. That’s pretty close to the consensus forecast for Friday’s numbers of about 187,000 new jobs, according to the Wall Street Journal’s survey of professional forecasters. In terms of a range of outcomes, we should expect a worst-case scenario of about 91,000 new jobs in March, and a bullish best-case scenario of about 298,000 jobs (that’s two standard deviations in either direction from the 195,000 average above). Any job gains beyond that range should raise eyebrows among analysts and could signal a turning point for the U.S. labor market -- for better or worse.   To speak with Dr. Andrew Chamberlain about this month’s jobs report or labor market trends, contact pr [at] glassdoor [dot] com. For the latest economics and labor market updates, subscribe to email alerts here and follow @adchamberlain.