Payrolls were up a solid 257,000 last month and strong upward revisions to prior months’ payroll gains reveal an uptick in the pace of job creation in recent months. Wage growth got a slight bump and the labor force participation rate ticked up as well, in what is a uniformly impressive jobs report, another in steady line of reports showing that the economic recovery has reliably reached the labor market. While we are clearly not yet at a full employment economy, characterized by a very tight fit between the number of job seekers and jobs, we are moving in that direction.

Over the past three months, payroll growth has averaged 336,000 per month. A year ago, the comparable number was 197,000. My patented jobs day smoother, shown below, also captures the recent acceleration in net job creation, as the three month average is notably above that of six and 12 months.

Unemployment ticked up slightly, to 5.7%, as more people entered the job market than found employment. But especially given the accelerated pace of job creation, this is good sign, signaling the potential return (we don’t want to over-interpret one month’s move in this noisy series) to the labor force of sideliners who’ve been waiting for better prospects. The labor force participation rate ticked up 0.2% in January, replacing a decline of the same magnitude in December. At 62.9%, this important indicator has clearly stabilized at about 63%, where it’s been wiggling around for about a year now. That level remains three points below its pre-recession peak, and is thus symptomatic of remaining slack in the job market (there are also still close to 7 million involuntary part-timers who’d like full-time work, another indicator of ongoing slack). Still, its stabilization is good news.

Hourly wages, which fell in December, rose 0.5% in January and were up 2.2% over the past year, compared to 1.9%, Dec/Dec. Given recent gains in weekly hours worked, weekly earnings are up 2.8% over the past year. Moreover, with energy prices holding back inflation, up only 0.7% when last seen, this translates into some of the first solid real wage growth in the recovery.

There is an important caveat here: nominal hourly wage growth is not accelerating in any identifiable way. As I’ll show later today, this result holds over various wage measures. At the same time, as noted, price growth is slowing, and not just “topline” inflation, but also core inflation, the Fed’s preferred measure.

Thus, from the perspective of Federal Reserve policy makers, the current economy is building up some pretty solid “Goldilocks” credentials: GDP growth is stable at around trend, the job market is reliably tightening, yet neither wage nor price growth are signaling inflationary pressures. It is thus critically important to recognize that we are not yet at full employment, and even if we get there, we’ll need to stay there to repair the considerable residual damage still with us from years of deep recession followed by what began as a weak recovery.

Source: BLS, my analysis.

[Data note: today’s report included various revisions to both the surveys of households and firms. The payroll survey annual benchmark revision raised the level of payroll employment slightly, by 91,000, as of March of last year. The household survey revisions did not affect changes in rates cited above.]

With all the labor market improvement, surely wage growth is accelerating…nuh-uh.

1) The sharply stronger dollar, as Martin Wolf points out, pushes against Fed tightening: it reduces inflation, weakens demand for our exports, and by most analysts accounts, will lower real GDP growth by something on the order of 0.5% over the next year, given its recent appreciation.

2) In their just released minutes, the Fed board clearly identified with the asymmetric risk that many of us Fed watchers have been emphasizing: “Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.”

3) Some recent reports suggest a tension among FOMC members as to whether they should be data driven or just basically assume that inflationary pressures lurk around the next corner, despite what the data say. The minutes from January revealed that “a number of participants emphasized they would need to see either an increase in market-­based measures of inflation, compensation or evidence that continued low readings on these measures did not constitute grounds for concern” (i.e., disinflation).

4) Remember, nobody knows what the “natural rate of unemployment” is, which is kind of a big deal in this space. The fact that our unemployment rate, now around the mid-fives, is close to the level that many US economists, including those at CBO and the Fed, consider to be the “natural rate” and yet neither nominal wages nor prices have accelerated only serves to underscore this point.

Given economists’ traditional understanding of such dynamics, this means that either the natural rate of unemployment is considerably lower than we think it is or the jobless rate is mis-measuring labor market slack.

I believe all three are true. That is, the natural rate is lower than we think (and very difficult to reliably estimate). Allen Sinai says it’s now 4.3%.

Two, there’s still more slack in the US job market than the measured unemployment rate reveals. I’ve got a new post on that in the making.

And three, our “traditional understanding of such dynamics” is incomplete. Specifically, we’ve historically paid too little attention to a key wage determinant: bargaining power.

So, there you have four factors pointing towards holding rates steady at zero for the near term. Which factors point the other way? There’s the tightening job market, for sure, but see #4 above. Given our uncertainty re key parameters, surely the best move is to stick with the data and keep your anti-inflation powder dry. Which sounds a lot like where at least some members of the FOMC are in fact at…at least for now.

Reprinted with permission from Jared Bernstein