Quiet Before Trade Storm for Employment in June

Payroll employment rose by 213,000 in June, after surging by an upwardly revised 244,000 in May. The gains are still solid by any measure, especially in an economy where job openings now outpace the number of people who say they are “actively” looking for a job. Gains were largest in professional services, which include a lot of new college grads. Temporary help, which once dominated this sector, accounted for less than a quarter of gains in June, which affirms the desire to bring on permanent hires. This marks a shift from the 1990s boom, when many companies relied on temporary firms to provide workers for an extended, sometimes years-long period of time.

Gains in manufacturing and health care were also strong. Gains in the manufacturing sector were broad-based with production in vehicles picking up with other sectors after a lull in May. Part of the move is in response to tariffs. Protected industries are increasing production until the bite of tariffs on margins hits while threatened industries are scrambling to get ahead of tariffs. The vehicle industry has been particularly aggressive in both importing and exporting their vehicles to land ahead of US and retaliatory tariffs.

Health care remains strong in response to the demographics of aging and renewed pricing power in the hospital sector. This is an area where inflation has also picked up as of late.

The one notable weak spot was retail, which suffered a blow during the month as announced store closings finally kicked in. The retail sector has struggled to gain the right balance between its in store and online operations, as shoppers want the convenience of both.

Average hourly earnings were a bit of a disappointment, rising only 5 cents per hour in June, and holding at a 2.7% pace from a year ago. This continues to be a concern for the Federal Reserve, which has been struggling to formulate policy in an economy where inflation is picking up but wage growth is not. The fear within the Fed is that years of low inflation have taken a toll on both employer and employee expectations, and at least temporarily broken the relationship between inflation and wage growth. The tariffs compound this problem by cutting into margins in key sectors, making it harder for manufacturers to raise pay. Companies would rather pay existing workers to work more hours than hike the pay of new workers, which they now must train and retain.

Separately, the unemployment rate rose to 4% in June, after hitting an 18 year low in May. The participation rate moved up by 0.2% - almost all of that increase was due to women and teens reentering the labor force. The participation rate among men actually fell a tick during the month. Unemployed women tend to have higher educational attainment than their male counterparts, which makes them easier to employ. Teens have been largely ignored since the onset of the crisis, as they were forced to compete with much older and experienced employees. That is now shifting a bit. For teens seeking work this is probably the best summer since the onset of the crisis. It is notable, however, that the participation of teens in the labor force peaked in 1979.

Bottom Line
Employment continues to improve. The critical issue is trade and whether we can avert an all-out trade war. There is still hope, but deadlines are fast approaching. As we have seen, trade wars are like family feuds: tempers flare quickly.

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