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Forget the numbers, this job market is 'red hot.'

  • The job market rebounded strongly in October from the hurricane induced job slump in September.
  • The tight labor market is getting tighter. Unemployment fell again last month, and is on track to fall through 4 percent by early next year.
  • Big deficit-financed tax cuts as just proposed by the House Ways & Means Committee would be throwing gasoline on top of the red hot job market.
  • It is wishful thinking to believe that the proposed tax cuts will result in a bigger economy.
A glassblower working with a torch making small scale pipes and ornaments.
Bjones27 | Getty Images
A glassblower working with a torch making small scale pipes and ornaments.

The job market rebounded strongly in October from the hurricane induced job slump in September. Averaging the job gains of the past several months shows a jobs gain of closer to 175,000. This is probably not too far off the economy's underlying job growth – abstracting from temporary factors, like the hurricanes, and the monthly vagaries of the data, which there are always many.

Job growth is thus close to double the growth in the labor force. The labor force has been growing more quickly as of late, last month's dip aside, as labor force participation has improved somewhat with the better job market. Workers disenfranchised during the tough economy of the past decade have been coming back to work. However, this has largely played out, and participation will soon begin declining again as the large baby boomer cohort continues to retire en masse.

The tight labor market is getting tighter. Unemployment fell again last month, and is on track to fall through 4 percent by early next year. The last time we experienced sub-4 percent unemployment was briefly at the end of the technology boom around Y2K. Like then, labor shortage are becoming a big problem for businesses in many industries and regions of the country – there are a record number of open job positions – and this problem is sure to become even more acute.

"Today's job market would have been what it is regardless of who was president. Given the push to pass into law big deficit-financed tax cuts, that won't be the case for much longer."

Consistent with this is the recent pick-up in wage growth. Looking at the plethora of wage statistics, including average hourly earnings in the jobs report, wage growth has nearly doubled from where it was a few years ago. At just under 3 percent annualized, wage growth is still on the soft side compared to past times, but this probably reflects lower underlying productivity growth. Besides, wage growth is set to blow through 3 percent by next year.

Big deficit-financed tax cuts as just proposed by the House Ways & Means Committee would be throwing gasoline on top of the red hot job market. GDP and job growth would surge, but only for a few quarters, as the Federal Reserve will have no choice but to normalize monetary policy more quickly and bond investors drive long-term interest rates higher.

It is wishful thinking to believe that the proposed tax cuts will result in a bigger economy. Sure, lower marginal business tax rates would support more business investment and long-term growth, all else being equal. But not everything else is equal in the House tax plan. The tax cuts aren't paid for, and the resulting higher interest rates will wash out any benefit from the lower marginal tax rates. The economy will be no bigger from the tax cuts, but the nation's debt load will be.

The U.S. isn't alone in enjoying a much better economy and job market. For the first time in a decade, the entire global economy is expanding. Stock markets are also up a lot everywhere. Even the perennial weak European and Japanese economies are experiencing solid job growth and rapidly declining unemployment.

This goes to understanding what is behind the strong U.S. job market. It's not specific to the U.S. or who is the U.S. president. Today's job market would have been what it is regardless of who was president. Given the push to pass into law big deficit-financed tax cuts, that won't be the case for much longer.

Commentary by Mark M. Zandi, chief economist at Moody Analytics, a subsidiary of Moody's Corp., and a leading provider of economic research, data and analytical tools. Zandi is also a co-founder of Economy.com, which Moody's purchased in 2005. Follow him on Twitter @economics_MA.

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