Looking for Another Solid Month for Employment

Payroll employment is expected to rise by 195,000 in June, a slight moderation from the 223,000 in May but still strong given the constraints on labor growth. Lower participation by prime-age (25-54 years) workers coupled with curbs on immigration have left employers scrambling to find workers in recent months. Posted job openings now outpace the number of people who say they are actively looking for work.

Our forecast shows a 189,000 increase in private sector jobs in June, with the public sector adding only 6,000 net new jobs. There are upside risks to public sector hiring because of the surge in government spending. The fiscal year 2018 budget, which was finally passed in March, includes hefty gains for defense and social programs; some of that could show up in hiring.

In the private sector, both manufacturing and construction are likely to increase. Hiring in the health care sector is expected to remain firm. Mining also looks strong but accounts for just a fraction of overall employment gains. On the downside, retail hiring likely suffered a blow from increased store closings. Jobs in trucking and warehousing, which are still expanding, have become harder to fill. Separately, a drop in the number of seasonal workers allowed into the country is expected to leave many resorts short of staff.

Strong gains in highly paid sectors of the economy should provide a lift to average hourly earnings; our forecast shows earnings up 0.3% last month. That would boost the pace of average hourly earnings growth on a year-over-year basis to 2.8% for June, up from 2.7% in May. The gains would be welcome but still running a bit tepid given the length of this expansion. Many on the Federal Reserve had hoped that we would be closer to a sustained pace of 3% wage growth by now.

The unemployment rate is expected to hold at an 18-year low of 3.8% for June. We expect the participation rate to move up a notch but it remains stubbornly low. The rising tide of retiring baby boomers is becoming harder to counter with increased participation from working age adults. The good news is that workers who were once ignored are getting a second chance. Employers have turned to former convicts for to find trainable and loyal workers. The largest hurdle is the opioid crisis. Concerns are growing about how to work with what was once a prescription drug crisis in rural areas that has expanded to affect urban, suburban and rural markets.

Long-term unemployment causes skills erosion, which is another hurdle to bringing people back into the labor force. Many men who were previously in male-dominated professions are reluctant to accept jobs in female-dominated professions. Health care is one example.

Future employment gains now will be heavily contingent upon whether new tariffs are reversed to de-escalate trade tensions. Manufacturers say tariffs are beginning to bite. The auto industry is next on the Commerce Department’s list. If we continue along this path, we can expect to see a slowdown in manufacturing late in the fourth quarter of 2018. Construction is also beginning to show the strains of tariffs on lumber and steel.

We expect the overall unemployment rate to dip to 3.5% by year-end, the lowest pace since the height of the Vietnam War in 1969. That was just a few months before the economy slipped into recession. We need to shift away from protectionism to avoid a repeat in 2019.

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