The Fed Cowers From A Phantom

In February, more Americans entered the US labor than gained employment—and by a wide margin.

The good news is that a net 313,000 people found jobs in February, becoming productive, earning money and adding to GDP. There are 115.2 million employed in the US. That was the headline news.

The largely unreported news is that a net 806,000 people entered the U.S. labor force in February, causing a rise in the labor force participation rate. This is also good news—the more people who want to work the better.

Thus, the also largely unreported news is that in February labor markets actually loosened a little bit, with another half-million or so people nationally looking for work, but unemployed. The official unemployment rate remained at 4.1%.

Wage growth is still largely a no-show. Average hourly earnings edged up four cents, or 0.1%, to $26.75 in February, a slowdown from the 0.3% rise in January. That lowered the year-on-year increase in average hourly earnings to 2.6% from 2.8% in January.

Obviously, with wages rising at well under 3%, any productivity improvements greater than 1% will mean wages are not helping the Federal Reserve hit its putative 2% inflation target. While output per hour has been limited since 2008, it has been rising at greater than 1%. And with capital abundant, and sales and profits rising, we are seeing nascent signs on productivity gains—as we saw in the sustained economic recovery of the 1990s.

In economics, good news tends to breed good news.

No matter. The Fed has all but committed to three, and perhaps four, rate hikes in 2018.


The Fed contends that natural” rate of unemployment is 4.75%, and so it has targeted that level in medium-term forecasts. The nation may well wonder how the Fed intends to reach that particular goal.

Certainly, wage growth is a back-burner concern presently. More people are entering the US labor force, keeping job markets loose, certainly as defined by wage growth.

So…why doesn’t the Fed target a replay of the 1990s. Lots of job growth, low unemployment, lots of prosperity, and mild inflation?


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