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Markets and Economy

What’s Behind Weak Job Growth

The economy only created 20,000 new jobs in February, compared to the 200,000 monthly average over the past seven years. Was this an anomaly, or is job growth slowing down?

The economy only created 20,000 new jobs in February, compared to the 200,000 monthly average over the past seven years. Was this an anomaly, or is job growth slowing down?

With the unemployment rate already in record-low territory, February’s sharp drop in hiring activity has sparked speculation that the labor market is finally leveling off. The nonfarm payrolls survey shows the economy added only 20,000 new jobs in February, which is a dramatic falloff from the approximate 200,000 monthly average since 2012.

One monthly report, however, doesn’t make a trend. It’s too early to tell whether this marks the beginning of a sustained downshift in employment growth, or simply reflects a bout of statistical volatility—it wouldn’t be surprising if hiring rebounded strongly in the spring. Regardless, the slowdown provides a good opportunity to consider what the return to a sustainable level of job growth might look like as the labor market tightens.

Too Early to Tell

Like many economic indicators, job growth is inherently volatile—when bad weather postpones construction projects across an entire region, or multiple automotive plants close simultaneously for retooling, aggregate job growth can slow precipitously. A handful of unfortunate coincidences can make the whole economy appear to be losing steam, when the underlying demand for labor remains strong.

In recent years, disappointing months for job growth have proven to be little more than statistical noise. In May 2016, the economy added only 15,000 jobs; September 2017 saw payrolls grow by only 18,000. On both occasions, the following month delivered a dramatic rebound, posting 282,000 and 260,000 new jobs, respectively.

This spring may follow the same pattern; however, the labor market is undoubtedly tighter today than in years past. Alternative employment indicators can provide more context for the current situation.

Looking for Corroboration

If job growth is truly leveling off, other indicators will reflect the weakness seen in February’s nonfarm payrolls survey. So far, however, neither the ADP payroll survey nor the Bureau of Labor Statistics’ household survey shows a marked decline in job creation. The three major employment indices are frequently at odds, but they tend to converge over the long run. In the coming months, we’ll likely see that either the nonfarm payrolls survey will rebound, or a decline in the alternate surveys will confirm that the labor market is softening.

Layoffs provide the most accurate leading indicator of labor market health, and they have risen only modestly in recent weeks. The uptick in layoffs has been concentrated in the Pacific Northwest, where fierce late winter storms likely disrupted many construction and agricultural projects. Since layoffs are based on an actual count of unemployment insurance applications, they provide the most comprehensive and timely indicator of labor market trends. Their relative tranquility suggests that the pause in job creation will be temporary.

Leveling off Is Inevitable

At some point, job creation will have to level off at a sustainable pace. The underlying growth of the working age population has slowed; only 50,000 to 75,000 new graduates are joining the workforce every month. Throughout the past decade, slack in the labor market has fueled above-trend job growth, but that pace cannot hold indefinitely.

Of the millions of discouraged people who dropped out of the workforce after the recession, only about 600,000 remain detached from the job search. The number of involuntary part-time workers is back to normal, and the workforce participation rate is closing in on its pre-recession high for every demographic group except teenagers.

Accelerating wages may be a sign that the last of the labor market’s slack is disappearing. Wages grew at a 3.5 percent pace last month, an increase from last year’s 2 percent average raise. Faster wage growth and slower hiring could be a sign that the economy is adjusting to the return of full employment.

Welcoming Normal

Last month’s apparent stall in job creation may prove transitory—it seems unlikely that the labor market would lose momentum so abruptly, especially without corroboration from other indicators. But it wouldn’t be surprising to see job growth slow toward a sustainable rate while wages accelerate in the coming months.

The labor market’s evolution at the top of the business cycle shouldn’t be alarming. The creation of 200,000 jobs every month isn’t normal; it was only made possible by millions of long-term unemployed workers. The job market’s return to normal should be a welcome sign for the US economy; a gradual slowdown in hiring could mean that the damage from the last recession is finally in the rearview.

View our economic commentary disclaimer.

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.

Jim Glassman