by Rick McGahey, SCEPA Senior Fellow
While May's stronger job growth is welcome, continuing low inflation and annual wage growth below 2.5% don't present any macroeconomic threats that warrant driving up interest rates. But the Fed, like many economic policymakers, seems to be operating in a "new normal" where an unemployment rate of 5.5% is considered full employment. That is not a world where most workers and families will make any significant economic progress.
The May employment report shows job creation numbers bounced back with a gain of 280,000. And an upward revision of the numbers for the previous two months added 32,000 jobs, pushing the three-month rolling average to 207,000 new jobs per month. The unemployment rate ticked up by a probably meaningless one-tenth of a percent, to 5.5%. The big jump in employment has many observers predicting a Federal Reserve interest rate increase sooner rather than later.
But even with these job gains, we still are not seeing significant labor market pressures.
Average hourly wages have risen by 2.3% in the last year, while average working hours have not moved at all—34.5 hours per week, the same as a year ago. And labor force participation remains at historically low levels, suggesting that there are still many potential workers who could be drawn into the market if jobs or wages were growing faster.
Nevertheless, it is a strong monthly jobs report, and will be reassuring to those observers—like me—who feared that weak reports in the previous two months, coupled with other feeble macroeconomic data, might be signaling an economic slowdown.
Indeed, first quarter GDP figures have been revised downward, and now show a negative seven-tenths of a percent decline. (Many economists think something is awry with the first quarter estimations of GDP, and argue that the economy actually grew slowly in the first quarter.)
Today's employment report has some economic observers predicting the Federal Reserve will start raising interest rates this summer, perhaps as soon as next month. Others argue that with an annual inflation rate still below two percent, the Fed should hold off.
These cautionary voices include Christine Lagarde, head of the International Monetary Fund, who this week advised the Fed that it would be "better to wait for stronger signs of inflation pressures and have an interest rate hike in the first half of 2016." The IMF, like many observers, sees continuing U.S. growth as essential for the world economy, given the difficulties in the Eurozone and slow growth elsewhere in the world, and doesn't want a U.S. slowdown at this point.
But the Fed isn't likely to heed that advice and is on track to raise rates this year, absent "some dark cloud" threatening growth, says William Dudley, head of the New York Fed.