When is an increase in the unemployment rate good news? When it goes up for the right reasons, as it did in January, thanks to a swelling cadre of job seekers. Specifically, many more people got out and looked for employment last month, ostensibly perceiving that the odds in their favor had improved. This occurred in response to decidedly better hiring data over the past year and for the last three months in particular.
In the midst of a very lackluster four years following the end of the recession, job creation lagged badly and many able-bodied workers became discouraged and left the workforce. Thankfully, the landscape has improved markedly and the picture is considerably brighter today. According to the Bureau of Labor Statistics, the U.S. economy created 257,000 new non-farm jobs in January to continue the recent streak of strong growth. Gains were well diversified across sectors, yielding new hires in retail, health care, construction and manufacturing.
The report contained good news regarding previous months as well. Revisions to the last two months' tallies packed on an additional 147,000 new jobs, bringing the three-month average gain to 336,000 per month, a pace consistent with the more robust economic growth that has so far eluded us during this recovery. January's gains capped off the best three-month streak since 1997.
One might expect some workers to give up looking after a prolonged inability to find work, which is exactly what occurred in the aftermath of the 2008 recession. These discouraged workers are no longer counted as unemployed once they curtail their active job search, a development which understates the true unemployment rate. Today we see clear evidence of more optimism among potential job seekers, enticing them back into active search and getting them counted once again as unemployed, at least until their search is successful. Bad news in this case is good news, assuming the trend continues.
But wait, there's more. One of the most distressing aspects of the financial crisis and its aftermath has been the unprecedented increase in the ranks of the long-term unemployed, defined as being without a job for 27 weeks or more. This particularly worrisome statistic peaked at 48 percent of all unemployed, nearly double the previous post-war record. January's optimistic numbers brought more welcome evidence that the long-term segment of the jobless population continues to shrink, declining to 30 percent in the latest report.
Another sign of gathering economic strength was provided by the wage gain data in the report. Average hourly earnings for private non-farm workers increased by 2.2 percent over the previous year. The gain significantly exceeded the inflation rate for 2014 and could serve as an early signal that labor shortages may be building in some sectors as employment expands. Anecdotally, employers are reporting more difficulty filling critical positions, while government data indicates that posted job openings are at 14-year highs.
The undeniably positive January jobs report has economists speculating about how the Fed will respond. Conventional wisdom held that the central bank would stand pat on interest rates until at least September, but this assumption is under review in light of the surprisingly puissant labor market performance of late. A June rate hike is not out of the question, particularly if the employment growth trends continue into the spring. However, given the improved underlying strength of the economy and the likelihood of further wage gains ahead, interest rates are clearly too low now already.
Good news for job seekers but also for the larger economy.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.