The U.S. job market cooled in April but this doesn't imply that the expansion is in trouble. Trend job growth has been running strong, and it was expected to moderate at some point this year. Still, it's unclear whether April signals the beginning of a pullback or is simply a blip.
Some weakening in job growth shouldn't raise a red flag; job growth should remain significantly above what's needed to keep pace with growth in the working-age population. Therefore, the labor market will continue to tighten, likely more quickly than the Fed anticipates and that will put upward pressure on wages. Average hourly earnings - not our preferred measure of wages -- rose 0.3% in March, up 2.5% on a year-ago basis and a touch better than the 2.3% gain in March 2015. Deep Dive: U.S. Employment Situation
The employment cost index is our preferred measure and it was up 2.1% on a year-ago basis in the first quarter, in line with the recent trend. However, digging deeper shows a stronger gain in base pay, which is more important for consumer spending and is a subtle hint that the tightening in the job market is translating into increases in workers' base pay.
The ECI defines wages and salaries as total earnings before payroll deductions, including production bonuses, incentive earnings, commission payments, and cost-of-living adjustments. Incentives were a weight on wage growth in the first quarter. On a not seasonally adjusted basis, private wages excluding incentive pay rose 2.5% on a year-ago basis, the strongest this cycle. Year-over-year growth was up 0.4 percentage point compared with the first quarter of 2015, among the largest gains over the past few years.
This may suggest businesses are becoming less reluctant to boost base pay, consistent with other signs that the job market is tightening and is near full employment. That said, there is plenty of room for improvement, as growth in non-incentive wages are weaker than implied by the U-6 unemployment rate.
If You Squint, Signs of Stronger U.S. Wage Growth
Source: Moody's Analytics Economy.com
It is also important to keep in mind that the bar for job growth is low. The number of jobs needed to keep pace with the working-age population -- the break-even rate -- is a function of growth in the noninstitutional population 16 years and older and the labor force participation rate. An adjustment is also needed to make the establishment and household surveys comparable. The latter is where the unemployment rate is calculated.
Recently, the economy has needed to add only around 100,000 jobs per month to keep the unemployment rate stable, and trend job growth has been running more than double that number. Therefore, April's 160,000 increase in nonfarm payroll jobs exceeded this threshold and shouldn't be labeled as a poor report.
The break-even rate will vary going forward. We estimated it based on a number of assumptions, primarily around the labor force participation rate. For example, the labor force participation rate rose more than we had expected in the first quarter but it fell 0.2 of a percentage point in April, to 62.8%. Assuming it remains stable, around 63%, through the end of 2017, break-even job growth will average 120,000 per month.
If the labor force participation rate rises 0.2 percentage point per annum, which would exceed the largest gain since 2000, break-even job growth would average 170,000. This would be a reasonable estimate for the high end of the possible range because we believe the labor force participation rate won't peak noticeably higher than 63%. If the labor force participation rate resumes falling, break-even job growth will fall below 100,000 per month.
All told, monthly job growth of 100,000 per month will eventually become the new 200,000. Deep Dive: U.S. Employment Situation