Job growth good for Obama; stagnant wages not so much

Thursday's jobs report showing a gain of 288,000 positions and a dip to a 6.1 percent unemployment rate provided fairly convincing evidence that the 2.9 percent first-quarter GDP decline was an anomaly created by the brutal winter and sharp inventory reductions.

It was certainly welcome news for Democrats who feared their one 2014 advantage—a strengthening economy—could be slipping away.

AP

In fact, most signals now suggest the pace of job creation may actually strengthen as the year goes on. Jobless claims and hiring intentions surveys all point to the current 266,000 per month pace holding up if not strengthening.

This is good news for President Barack Obama whose approval ratings remain at historic lows, especially on the economy. His numbers should start to tick up at least a bit as the jobless rate falls. But they probably won't rise much unless wages start improving faster than the rate of inflation, which is not currently happening.

And that's where things get complicated.

Because if wages do pick up from the current growth rate of 2 percent they may stir a highly dovish Fed into swifter inflation-fighting action. So far, Fed Chair Janet Yellen has made it clear she views recent increases in consumer price inflation as mostly noise and not a reason to push forward the central bank's timetable of the first rate hike toward the second half of next year. And she still thinks there is significant slack in the labor market.

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But many economists disagree and believe the labor market is actually fairly tight with the short-term jobless rate back to its historic average and more companies reporting difficulty filling open positions. According to this view, the 3.1 million long-term unemployed are not likely to be helped by continued below zero interest rates.

"[W]e are about as sure as we can be that wage gains are set to pick-up over the next six months," Pantheon Macroeconomics' Ian Shepherdson wrote in a client note. "At the same time, we think core inflation is set to rise further, as companies seek immediately to offset the margin squeeze implied by faster wage gains."

Shepherdson argues that faster wage gains coupled with increased price inflation later this year will cause the Fed to boost rates by March of 2015 at the latest with a 2 percent fed funds rate by the end of next year.

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Other economists concur that the Fed is nearing the point where it risks falling behind on its mandate of price stability. "[T]he risk of staying too easy for too long is growing," High Frequency Economics' Jim O'Sullivan wrote in a client note. "The Fed's mandate relates to the labor market and inflation, not GDP and inflation. Despite the weakness in [the first quarter], the labor market data look much more consistent with acceleration than deceleration."

Some critics of the Thursday jobs report suggested that, while heartening, it could be another false dawn like we saw in 2012. This could be correct but there are clearly fewer headwinds than there were then.

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Congress has moved away from damaging confrontations over the budget and the debt ceiling that crushed business confidence in 2012 and directly led to the decline in hiring. The other big Washington battle, over whether or not to reauthorize the Export-Import Bank, is important in the long term and for specific U.S. companies but none of the possible outcomes would have a large short-term impact on the economy.

—By Ben White. White is Politico's chief economic correspondent and a CNBC contributor. He also authors the daily tip sheet Politico Morning Money [politico.com/morningmoney]. Follow him on Twitter @morningmoneyben.