The job market is booming, with employers adding a robust 257,000 new jobs in January. During the last three months, job growth has averaged a blistering 336,000 per month. Wages are finally rising by more than inflation, and unemployed people who gave up looking for work are finally looking again. "This might just be the most perfect payrolls report ever," economist Justin Wolfers tweeted about the January job numbers.
With luck, the good news will continue throughout 2015. But there are two new factors clouding the outlook.
The first is the depressed price of oil, which has risen back above $50 per barrel but is still half the price it was last summer. The sharp drop in gas prices has put billions back into the pockets of consumers, who are spending about 35% less on gasoline than they were a year ago. But cheaper crude has also led to cutbacks in the energy sector, including thousands of layoffs nobody saw coming just a couple of months ago.
Outplacement firm Challenger, Gray & Christmas tracked corporate layoffs totaling 53,000 in January, which is the highest level in two years. More than 20,000 of those were from energy firms, the most of any sector. A year ago, the biggest layoffs were in retail, while job cuts in energy were inconsequential. With the U.S. rig count continuing to fall, energy-related layoffs may just be getting started.
The energy sector accounts for about 10 million jobs, which is roughly 7% of the U.S. labor force. So even five-digit layoffs seem unlikely to make a big dent in the overall job numbers. Still, there may be harder-to-measure knock-on effects from low oil prices, such as a slower pace of hiring in the energy sector and industries that support it (in addition to layoffs), which have been one of the few unambiguous bright spots in the economy. Manufacturing firms that supply oil and gas equipment could suffer down the road, as well. And energy jobs are among the highest-paying, so a slowdown could cut into overall wage growth, which is already anemic.
Strong dollar hazards
The other fresh risk to jobs is the remarkably strong dollar. Patriotic types sometimes assume a strong dollar is good and a weak dollar is bad, but the sharp appreciation of the dollar against other currencies just produced the biggest one-month increase in the U.S. trade deficit ever. EVER. That means we purchased way more imports—stuff made overseas, by other people—and sold far fewer exports, which are products made here, by Americans.
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One month of volatile data can be a fluke, but it does stand to reason that U.S. exports may drop further if the dollar continues to appreciate against the euro, yen and other major currencies, as many economists expect. A so-called manufacturing renaissance has barely gotten started, with the number of jobs in the sector up slightly from a low point in 2010, but still 30% lower than the number in 2000. A sharp drop in exports would throw that trend into reverse, since overseas markets are an important destination for U.S.-made goods. A recent drop in labor costs, in fact, has made manufacturing in the United States more desirable and lured more firms to U.S. shores. Maybe not for much longer.
Also worrisome is the fact that exchange-rate fluctuations usually aren’t fully reflected in trade data for 6 to 12 months. So the sharp shift in the latest report could signal bigger changes later this year. "Growth in the first half of this year will be weaker than previously projected, since demand is shifting away from goods produced in the U.S. to goods produced abroad," forecasting firm IHS Global Insight explained recently. The strong dollar, they argue, has become "a major headwind" for the U.S. economy.
Other parts of the economy should still continue to grow and add jobs. The savings on gasoline has put consumers in a better mood, which makes them more willing to spend. That will boost demand for other things and possibly add to job creation. A pickup in wages is long overdue and finally seems to be materializing. Companies such as Ford (F), General Motors (GM) and Aetna (AET) have hiked pay recently, and the January jobs report shows a modest 2.2% increase in hourly wages during the last 12 months, which is about half a percentage point higher than inflation.
But the stutter-step recovery of the last 5 years may still have some zigs and zags to watch out for. It's hard to improve upon a perfect jobs report.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.