It’s Simple: The Economy Is Strong Because the Labor Market Is Strong

While it seems like most people are waiting for the proverbial other shoe to drop, the economy keeps coming up with surprises. To the upside. I think that’s really been a theme over the last year, and something Ryan Detrick, Chief Market Strategist and I chatted about with Neil Dutta, about on our Facts vs Feelings Leap Day livestream. Neil is the Head of Economic Research and Partner at Ren Mac LLC – our favorite economist (but don’t call him that). In short, a big “risk” right now is that people underestimate how strong the economy is.

Case in point: the February jobs report.

The economy created 275,000 jobs in February, well above expectations for an increase of 200,000. Now payrolls gains for January and December were revised lower, but that’s why you take 3-month averages. The 3-month average of job growth is running at 265,000. For perspective, monthly job growth in 2019 averaged 166,000.

The naysayers may argue, “But the unemployment rate went up from 3.7% to 3.9%.” Yes, but 3.9% is still strong and the unemployment rate has remained below 4% for 25 straight months. Plus, the increase in the unemployment rate was due to a jump in unemployment rates for young workers, which are always volatile. For 16-19 year olds, the unemployment rate jumped from 10.6% to 12.5%, and for 20-24 year olds, it jumped from 5.9% to 7.25%. For everyone else (25 years and older), the unemployment rate was unchanged at 3.2%.

Definitional issues around labor force participation (which is how the unemployment rate is calculated) and demographics (an aging society, with more people retiring every day) is why I like to look at the “prime-age” (25-54 years) employment-population ratio. It’s a more straightforward measure, which tells you how many people in their prime working years are employed relative to the population. That went up from 80.6% to 80.7%, which is higher than at any point between July 2001 and February 2020. That should tell you how strong this economy is.

What Does This Mean for the Federal Reserve?

The strong labor market raises the question as to whether the Federal Reserve (Fed) will cut interest rates this year. We think that’s still in the cards. We can just take Fed Chair Powell’s words for it, from his semi-annual Humphrey-Hawkins report to Congress and Senate this week. He said that inflation is progressing lower, and while they’re not ready to cut rates yet, they are well aware of the risk of waiting too late to cut, and that they “can and will” start lowering rates this year. That led to yet another record high for the S&P 500 on Thursday, its 16th record close of the year.

In short, it’s still about inflation, and the forward-looking data suggests it’s likely to continue on its downward trend. I wrote about this in a blog after the “hot” January inflation data was released.

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Even connecting the labor market to inflation, wage growth is not surging. Income growth across the economy is a sum of:

  • Employment growth
  • Wage growth
  • Growth in hours worked

Over the last three months, that’s running at an annualized pace of 4.7%, putting it right at the 2018-2019 average. That’s a sign of a strong economy, but not enough for the Fed to be overly concerned with wage growth threatening to push inflation higher.

I’ll end with this. I mentioned above how the prime-age employment-population ratio is above anything we’ve seen over the last two cycles. In fact, for women, that ratio is at 75.2%, very close to the record high.

Happy International Women’s Day! And to that end, I can’t help but share this picture from the NYSE opening bell ringing this morning, which shows Carson’s SVP, Investments & Trading Jessica Golson up there celebrating the day (first row, all the way on your left). All of us are super proud of her and everything Carson is doing to lift the role of women in our industry.

Ryan and I talked with Jessica on Facts vs Feelings last year. I highly recommend a listen, if you want to learn more about her, and everything we’re doing on the Carson Team.

You can listen to it here or watch below:



For more content by Sonu Varghese, VP, Global Macro Strategist click here.


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