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Employment Gains Slows in November

RFP
Payroll employment rose by 155,000 in November after being revised down slightly in October. Gains were concentrated in health care, professional services and manufacturing. The demographics of aging are helping to buoy gains in ambulatory care and at hospitals. Professional services remained strong with gains in full time hires continuing to dominate gains. This contrasts with the boom in the late 1990s when temporary workers were filling full-time jobs for years at a time.

Manufacturing employment slowed slightly but remained strong. A loss in vehicle production was more than offset with gains elsewhere. High-profile cuts in the vehicle sector are expected to mount as we move into 2019. Car sales have plummeted as consumers have opted to buy more fuel-efficient SUVs in recent years. Mining and logging jobs posted a small decline. Look for more weakness in response to lower oil prices in the months to come. The weakness we are seeing in the oil sector is great for consumers but bad for those producers. The real estate market in Dallas is showing the strains of lower energy prices.

Transportation and warehousing posted another month of solid gains. Couriers and messengers drove the gains. This includes everything from flower to food delivery and some short-hall online deliveries. Warehousing continued to add jobs but not at the same pace we have seen in recent years. Many of the larger warehousers are substituting entry-level workers for management. This has resulted in a boost in pay for entry-level jobs but squeezed some management pay. Indeed, low-wage households are seeing much stronger gains than middle-income households. This marks a shift from historic norms when an increase in low-wage jobs moved all the way up the food chain in terms of pay.

Retail employment posted only moderate gains. Big-box discounters dominated. Many traditional department stores reported increasing the number of hours worked for existing workers as seasonal hires were harder to find. The weakness was in toy stores, sporting goods and electronics. Recent iPhone sales, which had been the primary mover in electronics for years, have disappointed this year.

Construction employment softened. The largest weakness was in the highest paid specialty construction sector, which caters heavily to the housing market. New home construction is slowing in response to higher mortgage rates and years of outsized price gains. The only offset could be the rebuilding associated with recent fires in California. Nearly 19,000 buildings were destroyed in Paradise, California, most of them shelter. Insurance and funds from FEMA are uncertain. FEMA funds were already stretched prior to the fires.

Average hourly earnings increased 0.2%, bringing the year-over-year gain to 3.1%. That matches the high we hit in October. Wage gains have moved up significantly from the subdued 2% average we saw during much of the expansion but remain well below the highs we saw during the 1990s boom. This will provide the Federal Reserve with the evidence it needs to hike rates a fourth time this year in December. We expect to see rate hikes slow to half of that pace in 2019. Our forecast has the Fed raising rates only two times in 2019 and then reversing course at year-end as the economy softens.

The unemployment rate held at 3.7%, as expected. The participation rate remained unchanged after a pick-up in recent months. Prime-age women have come back much faster than their male counterparts over the last year. November represented a pause in participation overall. The U-6 measure of unemployment rose to 7.6% from 7.4%; that stress measure dropped below 7% during the height of the 1990s boom. It includes those forced to worked part-time instead of full-time and those who are marginally attached to the labor force. Fed Chairman Jay Powell has gone out of his way to underscore the Fed’s desire to boost participation by prime-age workers but the tools are limited. Those suffering long-term unemployment have had a particularly hard time getting new jobs. Bias and an erosion of skills are both factors.

Bottom Line
Employment gains slowed in November. Some of the slowdown represents a giveback after unusually strong gains in October. We recouped employment that had been lost temporarily due to hurricanes. There are some signs of weakness in vehicle production and construction activity that are more worrisome. The Fed will be watching those shifts closely as we enter 2019 and slowing rate hikes accordingly. Look for the Fed to lay out a much less predictable and more flexible path of rate hikes with the statement and forecasts following the December meeting.

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