EMPLOYMENT GROWTH

Employment growth is estimated to be 244,000 in October and 228,000 in November after a final number of just 38,000 in September. However, the low September number largely reflects the temporary displacement of workers in hurricane-affected areas, especially in food services and drinking establishments. The three-month average growth of 170,000 jobs is right in line with the average employment growth of 176,000 in the first eight months of the year.

Real gross domestic product (GDP) growth in the third quarter was 3.2% at the seasonally adjusted annual rate, slightly higher than 3.1% in the second quarter. This is especially impressive, since many observers expected a slight decline due to hurricanes Harvey and Irma. There was a slight deceleration in third quarter personal consumption expenditure, per the Bureau of Economic Analysis, but this was outweighed by faster growth in private inventory investment and other factors.

Moody’s forecasts private employment growth to be 1.7% this year and 1.6% in 2018. The Bureau of Labor Statistics projects the civilian labor force ages 20–64 will rise from 144 million in 2016 to 150 million in 2026, an annualized growth rate of just 0.4%. This may make it difficult for employment growth to remain around 2% as it has been since 2011. If employment growth cannot come from demographics, it must come from bringing more potential workers into the workforce. The labor force participation rate has been stable since 2015. And the U-6 unemployment rate, which includes discouraged and underemployed workers, has recently declined to 8.0%. It has not been this low in over a decade.

The Drilling Down section of this issue examines employment growth and wage growth in detail by state and economic sector.

WAGE GROWTH

Average weekly wages are forecast to increase by 2.0% in 2017 and by 4.1% in 2018. The 2018 forecast is down from the 4.5% forecasted growth reported in the last Quarterly Economics Briefing (QEB) but would still represent a very large increase from previous years. The high forecast for 2018 continues to highlight the tension between low unemployment and the lack of wage growth that economists expect to accompany an apparently tighter labor market.

The unemployment rate kept falling last quarter, from 4.4% in August to 4.2% in September and 4.1% in October and November, the lowest rates since 2000.

In the last edition of the QEB, we discussed the possibility that wage growth for continuously employed workers may be masked, in part, by an inflow of lower-paid new entrants, who are drawn into the workforce by strong labor market conditions. We showed that the employment-to-population ratio is rising fast enough to suggest that indeed, the current labor market is pulling in weakly attached workers. In a weaker labor market, some of these workers would not even be actively looking for a job and would therefore not be counted in the unemployment rate.

Using survey data, we can directly evaluate the wage growth for workers who were continuously employed for a period of time. The Federal Reserve Bank of Atlanta publishes such a series for median wage growth¹ from 1997 to the present. As of November 2017, it reports median annual wage growth of 3.2% for continuously employed workers. This series has shown a general upward trend since 2010, when unemployment was over 9%, through the present. This evidence supports the hypothesis that changes in workforce composition are masking upward wage pressure. However, that current wage growth of 3.2% is still lower than the roughly 5% median wage growth for continuously employed workers in the same series from 1998–2001 or median wage growth above 4% throughout 2006–2007, the last two times before the current run that the unemployment rate was below 5% for an extended period.

MEDICAL INFLATION

As discussed in last quarter’s QEB, we now monitor the medical component of the Personal Health Care deflator (PHC) from the Centers for Medicare & Medicaid Services (CMS) as our preferred measure of medical inflation. An element of medical inflation particularly important to watch is physician and clinical services. These prices make up one-fourth of the Personal Health Care expenditures measured by CMS and prices have grown very slowly since 2012. However, they are likely to increase, which would drive up medical inflation. CMS projects the PHC to grow at 1.6% in 2017 and 2.3% in 2018.² If the latter projection is realized, 2018 will see faster medical inflation growth than any year since 2010.

INTEREST RATES

In December, the Federal Open Market Committee (FOMC) raised the target federal funds rate for the third time in 2017, placing it at a range of 1.25–1.5%. The median participant judged that the appropriate target range by the end of 2018 is between 2.00–2.25%, between 2.50–2.75% for 2019, and above 3.00% for 2020, suggesting more raises are very likely in upcoming meetings if the economy continues on its current path.

These raises have been reflected in short-term Treasury rates but not long-term rates. On the last business day of 2016, the 2-year Treasury constant maturity rate was 1.20%, and 10-year rates were 2.45%. By the end of 2017, the 2-year rate had risen to 1.89% but 10-year rates had actually declined to 2.40%. Shorter-term rates are especially sensitive to federal funds rate fluctuations, but long-term rates are more sensitive to expectations of future inflation and economic growth. The present flattening of the yield curve partially reflects a declining inflation risk premium and may also reflect low expectations for economic growth, for reasons such as the small projected labor force growth discussed in the employment section.

Moody’s forecasts the interest rate on 10-year Treasury notes will rise to 3.1% in June 2018. This would be enough to avoid further flattening of the yield curve, as Moody’s predicts 2-year Treasury notes short-term rates to rise to 2.3% in June. The trends in short-term and long-term rates will be something to keep an eye on and will be discussed further in future editions of the QEB.