The economy might, but only might, be slowing. In March we added only 126,000 jobs, the lowest increase since December 2013, barely enough to absorb new entrants into the workforce. Almost all measures of the health of the labor market -- the unemployment rate, the number of workers jobless for more than 27 weeks, the number involuntarily working short hours or too discouraged to continue looking for a job -- remain more or less stuck at present levels. Some analysts say this proves the economy is slowing. Quite the contrary say others: the combination of a stable unemployment rate (5.5%) and an up-creep in wages (+0.3% in March) indicates that we have reached full employment, a situation in which the market has absorbed all those ready, willing and able to work, and job growth therefor creates upward pressure on wages. The Manhattan Institute's Diana Furchtgott-Roth notes that the labor market has been tightening over the past year -- a more reasonable period from which to draw conclusions than data for a single month -- forcing companies such as McDonald's and Walmart to raise wages. That she fears, might be a sign that inflation will take off if the Fed persists in keeping interest rates at abnormally low levels, a view shared by Carnegie-Mellon economics professor Allan Meltzer.
Federal Reserve Board chairwoman Janet Yellen will have to apply more than a dollop of judgment as she sorts through not only the recent jobs data, but the conflicting signals flashing both red for slowing and green for accelerating. Indications that the economy is far from robust are not hard to find. In the fourth quarter of last year, growth slowed to 2.2% from a healthy 5% in the previous quarter, and many expect that when data are published later this month they will show a further slow-down in the current quarter, perhaps to 1% (Barclay's, J.P. Morgan Chase) or less (Macroeconomic Advisers). The fall in oil prices, a net plus for the economy as a whole, is causing layoffs in the oil industry, with ripple effects on the economies of the oiliest states, among them Texas and North Dakota. The lack of any pick-up in jobs in the manufacturing sector reflects the combined effects of the negative impact on exports of the strong dollar, stagnation in euroland, and the decision of consumers to save rather than spend the solid 0.4% increase in incomes recorded in February.
Battling those tailwinds are some significant headwinds. The auto sector remains healthy, even as its growth slows a bit. Analysts are guessing that low gasoline prices and rising incomes will enable the industry to "move the metal" at a rapid pace, with consumers snapping up between 17 million and 17.5 million cars and light trucks, more than in any year since 2006 -- and at prices that top those recorded last year. Toyota is leading the pack of competitors for the consumers' dollar, but the bottom lines of all manufacturers are benefitting from the surge in purchases of highly profitable sports-utility vehicles.
The important housing market also seems headed for a good year. Mortgage interest rates remain low, cheaper oil has put billions into consumers' pockets, and pending home sales -- a barometer of future completed sales -- are at their highest level since June 2013. Of course, if the Fed starts driving mortgage rates significantly higher, and if petrol prices return to levels prevailing before the Saudis started their price war on U.S. frackers, affordability might be hard hit and the housing market adversely affected. But the Fed at most will inch rates up a tiny bit, and the Saudis seem happy to stick to their pricing strategy, especially if (it now seems, when) removal of sanctions on Iran permits the mullahs to start exporting oil, which the Saudis want to see yield as little revenue for their enemy as possible.
Yellen undoubtedly will give special weight to developments in the jobs market, on which she has always focused because of her strong views on the terrible social consequences of unemployment. And against the slow jobs growth reported at the end of last week she will have to weigh an entirely contrary development: the decision of many companies to raise the wages of their lowest paid workers. Walmart set the trend in motion when it announced that it will raise the pay of some 500,000 of its workers to $10 per hour, well above the federal minimum wage of $7.25 (some states have set higher standards). Last week, McDonald's followed suit, benefitting 90,000 employees in the 1,500 outlets it owns in the U.S., and putting pressure on its franchisees, who operate 12,500 outlets manned by 750,000 workers, to follow suit. Other companies are being forced to meet the new wage levels or risk losing some of their best workers, which they believe would reduce "the quality of the customer experience", better known to bean-counters as "sales". It is no coincidence that both Walmart and McDonald's have seen their sales slow in recent months, and want to upgrade their labor forces as part of broader changes in overall company strategies.
Perhaps even more important in the long run is that something new is happening in America's labor market. It is not only competitive pressures that are driving several employers to raise wages, even for the 97% of workers who already earn more than the statutory minimum, and whose wages will be pushed up as they demand to be kept ahead of the newly better-paid employees. The question of just how much to pay workers at the lower end of the wage scale has become bound up with what may be the dominant political issue in the 2016 elections -- rising inequality and what to do about it. There is an emerging consensus that inequality is in some difficult-to-define sense unfair, that it is a drag on economic growth, and that we are in danger of creating a permanent underclass, for which the American dream has turned into a nightmare. Which may explain why McDonald's not only announced raises for the low-paid, but added a benefit -- the company will henceforth cover the cost of employees' online education aimed at earning high school diplomas, and assist employees with college tuition. This applies not only to the 90,000 workers in company-owned eateries, but to the 750,000 employed by franchisees.
A small step towards reducing inequality, say advocates for minimum-wage workers. Likely to raise labor costs and kill jobs for some of the intended beneficiaries, counter many labor-market analysts. They both might be right.
