Labor Market Is Nearly Full

Labor Market - Job Growth Continues To Slow

The all-important July monthly Labor Market Report got swept under the rug. Mostly because of how much news has come out on earnings, monetary policy, and the trade war.

Another reason the July report didn’t get as much coverage as usual is it came in near estimates. This report is known for missing/beating estimates wildly. It’s tough to precisely forecast the number of jobs created when there are many outliers which are small as a percentage of the labor market.

6 month moving average of job growth usually isn’t that volatile. But the market likes to react to the latest numbers even if that’s not the best idea. 

July jobs report was weak because it showed slowing job growth. Private sector job creation missed estimates and the prior 2 months of data were revised lower. Let’s get into the specifics.

May job creation was revised down by 10,000 to 62,000 and June job creation was revised lower to 193,000 from 224,000. That helped lower the 3 month and 12 month moving averages seen in the chart above.

July job creation beat estimates for 151,000 as it was 164,000. However, that beat becomes a miss when you just look at private sector jobs. Specifically, there were 148,000 private sector jobs added which missed estimates by 12,000.

Labor Market Getting Full

Labor Market - This trend in job creation is lower. Average monthly job creation has been 165,000 in the first 7 months of the year. In comparison to the first 7 months of previous years, this was the lowest average monthly job creation since 2010. That's when 91,000 jobs were added per month because the economy was just exiting the 2008 recession.

Even in the first 7 months of 2016 when the economy was near a recession at the beginning of the year, there was an average of 200,000 jobs added per month.

By most metrics, current economic growth is stronger than it was in 2016. The labor market being nearly full is limiting job creation. Current average monthly job creation is slightly higher than population growth.

The chart below supports the point that the labor market is almost full as it shows the number of multiple job holders is up and the percentage of small businesses saying there are few or no qualified applicants for job openings is also high.

Labor Market - Job Creation By Industry

The chart below shows job creation in each industry. I find the positive job creation in construction surprising. 4,000 jobs added isn’t a huge deal, but it’s surprising there is any job creation since in June construction spending was down 2.1% yearly.

Private non-residential construction was down 0.4% yearly and private residential construction fell 8.1%. If the lowest mortgage rates in 3 years help demand for housing in the next few months, this decline in private residential construction spending might reverse. But in this environment, we would expect to see job losses in this industry.

In June, manufacturing job creation was revised from 17,000 to 12,000

Labor Market - But in July there were 16,000 jobs added which beat estimates for just 5,000. That estimate was justified based on the weak PMIs we’ve been seeing.

In the July ISM manufacturing report, the employment reading fell 2.8 points to 51.7. In the Markit manufacturing report, the employment index fell for the first time since June 2013 and output fell at a 3% annualized clip.

Negative part of the manufacturing labor market in the July BLS report was that hours worked per week fell from 40.7 to 40.4. Plus, overtime hours fell from 3.4 to 3.2. The next step after declines in hours worked is firing workers.

Job creation in educational and healthcare services continued to be reliably strong as it added 66,000 jobs. This segment isn’t very cyclical. That explains why the BLS reading is a lagging indicator. Even in the depths of recessions the economy still needs teachers and nurses. That group shouldn’t show weakness for long.

Labor Market - Underemployment Rate Falls & Participation Rate Increases

Unemployment rate increased to 3.7% from 3.6%. Investors won’t pay much attention to that rate unless it starts to increase significantly (above 4.5%). Even so, I’d rather look at the 6 month moving average of job creation.

When that falls below 100,000, it will be clear the labor market is headed towards a contraction. Even though the unemployment rate rose, the underemployment rate fell. It was down 0.2% to 7% which is the lowest rate since December 2000. Lowest rate of all time, going back to 1994 is 6.8%. I don’t see it falling below 6.8% anytime soon since job creation is headed in the wrong direction.

Oddly, the overall participation rate increased from 62.9% to 63%, but the prime age participation rate fell from 82.2% to 82%. In the past few years, the overall participation rate has been stagnating while the prime age rate has increased.

As you can see from the chart below, the prime age employment to population rate has stopped increasing on a yearly basis.

Weekly Wage Growth Falls

Labor Market - Overall average hourly wage growth was solid, but because the length of the work week fell, weekly wage growth fell. Specifically, average hourly wage growth increased from 3.1% to 3.2%, but the length of the work week fell from 34.4 hours to 34.3 hours.

That decline in the work week length might not seem like a lot, but it pushed weekly wage growth down from 2.84% to 2.61%. Unless headline CPI really falls, real weekly wage growth will fall.

We have seen inflation falling quicker than nominal wage growth, making for a great situation for the American worker. Cyclical weakness might ruin that situation.

Labor Market - Conclusion

The labor report showed job creation came in near estimates and weekly wage growth fell. This report wasn’t terrible. But its negative revisions support the narrative that the labor market is starting to show cyclical weakness.

Consumers still should be fine until it weakens further. I won’t worry about an outright recession until job creation stays below 100,000. And the unemployment rate jumps above 4.5%. 

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