U.S. labor market is showing shades of 2019
Given the pandemic distortions to our collective sense of time, 2019 can feel like either a decade ago or a month ago. Either way, the labor market is showing shades of 2019.
- But understanding the resemblance — and the crucial differences between now and four years ago — is key to understanding where things go from here.
Why it matters: The high-water mark of the longest expansion in history was 2019, which featured a strikingly healthy job market and low inflation. The question now is whether the remainder of 2023 can keep the former while returning to the latter.
The details: A John Wick movie sequel filling theater seats isn't the only similarity between then and now. Consider these comparisons of 2019 versus the first three months of 2023:
- Unemployment rate: 3.7% on average in 2019, 3.5% so far in 2023
- Average hourly earnings growth: 2.9% compared to 3.2% annualized rate
- Share of 25 to 54 year olds working: 80.0% then vs. 80.5% now (both are averages)
What they're saying: Federal Reserve chair Jerome Powell "has been dying for the economy to look like it did in 2019 and today's jobs report is basically like a really strong 2019 one," tweeted Peachtree Creek Investments' Conor Sen on Friday.
Yes, but: The differences are important, too. Both job growth and labor force participation are notably speedier now. The labor force has risen by 588,000 people a month so far this year, compared to 125,000 a month in 2019.
- Relatedly, job creation has been faster this year, with an average of 345,000 a month versus 163,000 a month in 2019.
- And most importantly, now the robust job growth and steady earnings of 2019 occurred against the backdrop of significantly lower price inflation, so those rising wages translated into rising living standards.
Between the lines: The question for the remainder of the year is how those differences resolve themselves — how, when, and whether inflation comes down and the rate of job creation normalizes. There are risks on both sides.
- One is that high inflation persists, which would depress American buying power and lead to yet more Fed tightening, with all the future pain that would entail.
- Or, some combination of tightening already in the system and a freeze-up in bank credit due to last month's events leads to an abrupt downturn, in which the robust labor market of early 2023 gives way to something weaker.
- Fed officials' formal projections implicitly embrace the second scenario, with the median official seeing the jobless rate rising a full percentage point to 4.5% by year-end.
What's next: The Consumer Price Index, due out Wednesday, is the first major reading on March inflation. Also taking on outsized importance, the Employment Cost Index, due out April 28, will give a more reliable look at whether wage growth is decelerating the way the jobs reports suggest.
The bottom line: It took a pandemic to undo the sunny economic conditions of 2019. If things turn cloudy in 2023, it will likely be a different culprit: the Fed.