Employment Numbers Support Interest Rate Hike

Talk of an imminent recession was somewhat blunted today as the U.S. Labor Department reported job growth in February. The unemployment rate stayed flat at 4.9% as employers added 242,000 jobs. Employment gains were noted in health care and social assistance, retail trade, food services and drinking places, and private educational services. Job losses continued in mining. In addition, the Labor Department revised job gains upward by 30,000 for the prior two months.

The numbers have market watchers speculating whether it’s enough to push up short-term interest rates when the Federal Reserve meets March 15-16. Other key economic indicators continue to paint a mixed picture of the economy, however. The Labor Department, for instance, also reported Friday that American wages decreased 0.1% from the prior month with a tepid annual gain of 2.2% as the average workweek shrunk to 34.4 hours—its lowest since January 2014.

The latest Federal Reserve’s Current Economic Conditions report released March 2, known as the Beige Book, also presented a mixed view of the economy, said NACM Economist Chris Kuehl ,Ph.D. “The changes were not all that substantial from what was reported in January, but where there was difference, it was significant,” he said. And “the most notable shift has been in the labor market.”

Despite an overall rise in employment and a desire to hire, the majority of Federal Districts reported difficulty finding qualified help. “In the majority of cases, the business community was struggling to find appropriate workers,” Kuehl said. “This is not a new issue, but the lack of talent and skill is spreading to industries in the service sector as well as in manufacturing, transportation and construction.”

Keuhl said he sees three basic employment issues taking place simultaneously. The first is that there don’t appear to be enough workers with the right skills and training. “Companies need people who are ready to slot in almost immediately and that has translated into a lot of poaching from other companies as opposed to taking on new people,” he said.

The second barrier is finding workers that can pass the entrance requirements such as drug screenings, Kuehl said. This has been a significant issue in manufacturing, transportation and construction. “They are also having issues with some of the physical demands,” he said.

The third barrier is employees with an “inflated sense of expectations,” Kuehl said. “Many of those applying for work are asking for more money and other compensation than is reasonable and have unrealistic expectations as far as future promotion is concerned.”

In past years, a lack of qualified workers would trigger companies to pay more for the people they need and wage inflation would start to kick in, he said. “This has not happened in the majority of markets. The Fed continues to see evidence of slowing inflation and very little evidence that higher wages are triggering any kind of rise. This means there is still no pressing reason for the Fed to take steps to hike rates as a means by which to tame inflation.”

- Nicholas Stern, NACM editorial associate

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