Before another "wow" monthly employment report was released today, we knew the U.S. economy was capable of generating lots of jobs as it recovered from the loss of 8 million caused by the global financial crisis. What we didn't know, however, was the answer to the “wage puzzle” -- whether, when and how wage growth would break out from a prolonged period of sluggishness that, unusually, has coincided with rapid employment creation (including 3.1 million new jobs last year, the strongest performance since 1999). This remains an important question for the economy, as well as the outlook for inequality and Federal Reserve policy. Full Employment The data released this morning confirmed the job-creation machine remains robust. A total of 257,000 new jobs were generated in January, exceeding consensus market expectations. Moreover, the two previous months’ additions were revised up by 147,000. And while the unemployment rate rose, to 5.7%, it did so for a good reason: The participation rate improved as more people re-entered the labor market. Importantly, the good news wasn't limited to the economy’s continued ability to create jobs. There also was an encouraging increase in hourly earnings in January, the biggest since November 2008. Should it endure, it would point to broadening labor market improvements and -– finally -– much better prospects for Main Street. As for the broader implications, here are four issues to keep in mind:
- The January data confirm that the U.S. economy continues to heal in an increasingly broad and inclusive fashion. This is essential to anchor the durable recovery the country needs and is capable of delivering, one that provides high growth and counters a further worsening of the inequality of income, wealth and opportunities.
- Assuming there are no damaging actions from Congress, such as a repeat of the government shutdown or another game of Russian roulette over the debt ceiling, the major threats to the U.S.'s cyclical recovery are less internal and more external: particularly, the sluggishness in Europe and the political and geopolitical tensions there.
- For this increasingly encouraging cyclical recovery to become a secular one, the U.S. needs to do more to enhance its potential growth rate. The budget plan released last week by President Barack Obama contained important ideas that may encourage a much needed national debate, even though they are unlikely to find enough support in a polarized Congress. The proposals include steps to reform outdated tax treatments, enhance infrastructure, ameliorate labor productivity and improve demand conditions in the economy.
- On their own merits, today’s data would encourage Fed policy officials to review their “patient” language when they meet in March. That would be a prelude to the probable initiation of slow, measured and gradual interest rate increases beginning this summer. The biggest possible impediment to that timetable would be adverse events on the international scene, which the Fed -- explicitly and unusually -- pointed to in its statement last week.