It is increasingly difficult if not impossible to deny the real improvements in labor markets in recent months. First, the ongoing declines in initial jobless claims clearly suggested the recovery was gaining depth and sustainability:
Then comes the February employment report along with upward revisions to the December and January numbers:
Nonfarm payroll gains are averaging a solid 245K per month over the last three months. Does this mean the Federal Reserve can pull back on the throttle? No, although I am sure you will hear the more hawkish policymakers using this report as evidence that policy reversal will happen sooner than markets anticipate. To be sure, that may still turn out to be true, but this data still reveals the depth of the hole left behind by the recession. But he majority of the FOMC will notice the stagnant unemployment rate (8.3%), a consequence of a small gain in labor force participation. If labor force participation rates begin to rebound, the improvement in the unemployment rate will stall, and the Fed could find itself willing to ease again later this year as suggested in this week's well documented Wall Street Journal article.
Moreover, note that wage gains remain anemic, both for all workers:
and for non supervisory and production workers:
The lack of substantial wage gains, combined with relatively low labor force participation rates suggests that we still have a long way to go before labor markets normalize:
Of course, if labor force participation rates stagnate while job growth continues unabated, the Fed will find themselves facing a more rapid drop in unemployment. That would certainly take QE3 off the table, and turn attention back to the timing of the next tightening cycle. This is not my expectation, but it certainly bears watching.
Bottom Line: Another good report, although still suggestive of the beginning of recovery. In my mind, true recovery will come when the cyclical declines in labor force participation are further reversed. At this point, there is no reason for the Fed to pull their foot off the gas. On net though, the employment report does push back the timing of any additional easing. The Fed will move to the sidelines while policymakers assess the level of slack in labor markets. If the cyclical downturn resulted in sustained structural damage, there may be little slack. But if an influx of returning workers puts a floor under the unemployment rate, the Fed will have more work still to do.
