Job Gains Slow
The U.S. nonfarm total employment increased by 75,000 jobs in May, and the unemployment rate remained unchanged at 3.6 percent. The headline number missed expectation for the month as the consensus forecast for the month was about 180,000 jobs. Job gain for the year-to-date ending in May 2019 is averaging 164,000 jobs well below the pace for the same period in 2018 of 230,000.
The change in total nonfarm payroll employment for March was revised down from 189,000 to 153,000, and the change for April was revised down from 263,000 to 224,000.
Over the year, average hourly earnings have increased by 3.1 percent, still considered decent growth despite a slight deceleration from April 2019.
The number of persons unemployed less than 5 weeks increased by 243,000 to 2.1 million, still a low number considering similar declines were registered during April 2019. And a broader measure of joblessness that includes part-time workers dipped to the lowest level in 19 years.
Labor force participation rate was unchanged to 62.8 percent in May 2019. The employment to population ratio remained unchanged since October 2018, hovering around 60.6 percent.
Employment by industry job gain was led by Professional and Business Services producing 33,000 jobs. Within this industry, core tech job gains were 21,300. During the last 12 months, the Professional and Business Services industry has produced 498,000 jobs. A large share of the aggregate job gains have occurred within this industry, over 58 percent of which are concentrated in Professional and Technical Services. In May 2019, the share of total employment in Professional and Technical Services has increased to 65 percent.
Education and Health Care Service industries produced approximately 27,000 jobs, a substantially slower pace than the job gain seen during March and April 2019 of 73,000 jobs each month. During the last 12 months, Health Care added 391,000 jobs, putting it in second place for this period. The annual pace of job growth in the Education and Healthcare Services industry was 2.5 percent as of May 2019.
Blue collar jobs in Leisure and Hospitality and Construction produced 26,000 and 4,000 jobs, respectively. The Construction job gain this month was below the April job gain of 30,000.
Leisure and Hospitality showed a better job gain in May than April 2019, however, the gain could be revised up next month as all seasonal summer jobs might not have been picked up during the first round of the survey.
Most other industries showed flat to slight job gains during May 2019 except Other Services (-1,000) and Government (-15,000). Manufacturing job gain has slowed so far this year when compared to the same period last year. From January to May this year, Manufacturing produced a moderate 30,000 jobs compared to 110,000 jobs over the comparable period last year. With manufacturing production still strong, the drop in job gains this year may be partially attributable to the industry’s use of more automation than labor.
The decline in Government jobs is due to state governments reducing employment by 15,000 jobs this year while the Federal government increased employment by 17,000, which includes a loss of about 1,000 jobs in January due to the Federal government shutdown that began on December 22, 2018 and ended on January 25, 2019 (35 days).
Different Measures of Wage Growth
Wage growth in the U.S. is measured in three ways — 1. “Headline” Wage Growth; 2. The Employment Cost Index (ECI); and 3. The Atlanta Federal Reserve Bank’s Wage Growth Tracker.
Headline Wage Growth
Headline Wage Growth is the average hourly earnings for all employees in private nonfarm payrolls reported by BLS each month in its Employment Situation news release, generally published on the first Friday of each month. The earnings data comes from the Establishment Survey.
Employment Cost Index (ECI)
The Employment Cost Index (ECI) is a quarterly measure of the change in the price of labor, defined as compensation per employee per hour worked. Closely watched by many economists, the ECI is an indicator of cost pressures within companies that could lead to price inflation for finished goods and services. The index measures changes in the cost of compensation not only for wages and salaries, but also for an extensive list of benefits. As a fixed-weight, or Laspeyres Index, the ECI controls for changes occurring over time in the industrial-occupational composition of employment. So, it may be thought of as a same store measure, in that, the same employee’s compensation and benefits are measured over the same period.
Atlanta Federal Reserve Bank’s Wage Growth Tracker
The Atlanta Fed's Wage Growth Tracker is a measure of the nominal wage growth of individuals. It is constructed using microdata from the Current Population Survey (CPS) and is the median percent change in the hourly wage of individuals observed 12 months apart. This is also a same store measure of an individual’s wage over time. The data are updated monthly after the underlying CPS data are released, usually two to three weeks after the release of the Employment Situation Report by the BLS. Wage Growth Tracker updates can be found here.
Wage Measures: Summary
What’s eye catching is the slower pace in Employment Cost Index (ECI) for wages and salaries and it becomes important to understand why the measure shows differing trends compared to the other two measures. The consensus is that wage growth is picking up at a higher pace compared to recent quarters but pace of ECI growth is lagging slightly behind the other two measures. If anything, the ECI and Atlanta (ATL) Fed series should move together since both are measuring common sample wage numbers. Does this mean that employers are paying higher rates to new employees and giving existing employees lower wage increases?
Since Q1 2009 through Q1 2014, the headline and Atlanta Fed wage growth series show similar trends. However, since Q1 2014, Atlanta Fed’s wage growth tracker increased pace, peaking at 3.8 percent during Q4 2016 and again at Q4 2018.
The headline wage growth numbers get the most attention since it is publicized a lot more than the other series. However, the Atlanta Fed and Employment Cost Index series are getting increasingly popular among economists who evaluate labor market situation from the wage growth perspective.
Despite the ECI series, headline and Atlanta Fed’s wage growth in the marketplace is very competitive since labor supply remains tepid. At this juncture, skilled labor shortage in multiple industries is real and not a publicized noise anymore.
What to Expect
Despite lower than expected job gain in May 2019, the ThinkWhy forecast remains unchanged since decelerating job growth has been previously forecast. Once June 2019 numbers are released, the magnitude of growth may be revised.
Continue to expect moderate job gains for the remainder of 2019, below the growth rate seen in 2018. The current pace of growth will slow compared to the first half of 2019 but will remain healthy considering how far we have come this cycle. The annual pace of job gains remains moderate at 2.3 million jobs or 1.6 percent.
Long-term, forecasted decelerating job gains during 2020 will be seen, bottoming during the 1st, 2nd and 3rd quarters of 2021. Expect gradual acceleration during the latter half of 2021, however, the magnitude of growth is expected to increase pace during 2022 and continue at a robust trajectory through 2024.
ThinkWhy™ It Matters
Despite the May jobs report, the U.S. economy is in healthy footing and pace of growth is at a sustainable level for this year and next as the labor market is healthier than it’s been in several decades. Since 2017, growth momentum has picked up pace and annual job gains are decelerating but still trending at a healthy stride for the year. Momentum is an important factor, in that, any slowdown in the economy, other than a bubble or other outside factor, becomes gradual rather than an abrupt fall. Household net worth, driven by home price growth, remains healthy and consumers are not shying away from spending, adding to growth. Corporate profits driven by lower taxes and regulation are doing their part by hiring and increasing the magnitude of pay.
Lack of Skilled Labor Force
Although there are enough workers available in the April jobs report, skilled workers may be hard to find. Many companies are now reporting that finding people to fill specific roles has become increasingly challenging, but keep in mind, the shortage is in SKILLED labor force. This is also evident from the JOLTs report. There are many workers in the U.S. that remain on the sidelines. It seems over 3 percent wage growth is not pushing them to join the labor force.
A very friendly business environment currently exists. The stimulus provided in 2017 is still in play now and businesses are less fearful of tougher regulations. Talk of an additional stimulus surrounding infrastructure spending may be dead now since the politics in Washington are becoming increasingly heated.
Interest rates remain low. With a slight push from the administration, the Fed is slowly believing in the “Growth Driven”, semi laissez-faire economy. With the May jobs reports, the Fed has even signaled the possibility of cutting rates, causing the stock market to substantially increase when reports came out this morning.
Trade and Tariffs
Even though a trade deals with China could be resolved soon, the talks have been lingering with rounds of negotiations that are on and off. If this continues, business and consumer confidence will take a hit impacting job growth. And if the tariffs are imposed, there is a very little doubt that decent job numbers would not be possible going forward given today’s economic scenario.
There are economists driven by politics or similar roles (economists who work in risk departments) who consider the May jobs report as “…the number overstating the case.” Expectations from these economists are flat to negative job numbers going forward. We anticipate that business capex is not dead yet and there is still some steam left through this year with gradual decreases being seen now through mid-2021. Having said that, there are outside shocks like the tariffs that create cause for caution.