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Employment Primer for August

Jobs Bounce Back, Wages May Disappoint

RFP
Payroll employment is expected to snap back after a temporary lull to hit 190,000 for August. Over 30,000 workers at Toys 'R' Us were let go when the company went bankrupt in July but those losses will not show up in the August data. In fact, many of those who lost jobs are already re-employed. Recent work on job losses in the state of Illinois suggests that people who are unemployed for a short period of time are now rehired much more quickly than earlier in the cycle. Some aren't even applying for unemployment insurance, which helps explain the low rate of jobless claims.

Employment in education is expected to increase with the return of kids to school and the growing number of schools that open in August instead of September. Many school districts are trying to edge closer to year-round schooling with more vacations during the school year and less time off over the summer. The goal is to limit the learning lost over a long summer holiday. One of the primary hurdles is a lack of air conditioning. Heat waves across the country meant that even places that are usually temperate had to open their schools to a lot of heat. Studies have shown that students who have to endure extreme heat in the classroom perform worse overall.

We expect demand for health care to remain a strong driver of job gains. The demographics of aging and a rise in retirements among baby boomers have exacerbated labor shortages. One of my nursing friends recently eturned to work after a leave of absence to care for her ailing husband, only to find she can earn more working fewer hours. Too bad wage gains are not more broad-based.

The Institute for Supply Management (ISM) Index bodes well for manufacturing employment. Hiring is up along with backlogs. Some companies, most notably in the steel industry, are opening idled plants. The ISM report showed concern about distortions created by tariffs. Anecdotal reports here in the Midwest suggest that many firms were stockpiling ahead of additional tariffs that could go into effect for China this month. Pricing pressures have been building overall.

The weak spot is average hourly earnings, which may have decelerated sharply on a year-over-year basis in August. We need to see a gain of $0.20 per hour just to keep the year-over-year gain in average hourly earnings constant at a still-tepid pace of 2.7%. That would be an increase of 0.8%. We are more likely to see an increase of 0.4%, which would slow year-over-year gains to a 2.3% pace, which could give financial markets pause about whether the Federal Reserve is likely to remain committed to rate hikes. Fed Chair Jay Powell made it clear there is only so much the Fed can do about stagnant wages. It does have an obligation, however, to remove excess accommodation as inflation returns to the 2.0% target. A rate hike in September is a done deal. A December rate hike is still extremely likely. Distortions created by back-to-back hurricanes artificially suppressed wages in October of 2017, which means we will have a more accurate read on year-over-year wage gains just prior to the December meeting.

The unemployment rate is expected to edge back down to 3.8% while the participation rate remains largely unchanged. The small number of people re-entering the labor force is largely being offset by the sheer volume of retirees leaving the labor force. Employers will need to rethink how they use older workers. Curbs on immigration, legal and illegal, are exacerbating labor shortages and increasing the need to retain baby boomers instead of retiring them.

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