Job Gains Point to Acceleration of Growth in Q2

Payroll employment jumped 223,000 in May, up nearly 70,000 from April. Health care remained strong with a pickup in hiring at hospitals; that is a sector expected to add to inflation in 2018. A return to more seasonal weather brought out shoppers. Retail employment was strong with nice gains in building and garden stores, hurt by snow earlier in the year. Job gains in general merchandise stores were surprising with a backdrop of retail restructuring; another flurry of store closings was announced late in May. Job gains were evenly distributed between department stores and big-box discounters. Both types of retailers have been pulling workers from store floors to in-store pickup and returns as part of their efforts to shore up online sales .

Transportation and warehousing posted solid job gains. Reports of labor shortages in both categories have intensified in recent months and limited employment gains. Turnover among truckers is particularly high as many older drivers are aging out of the workforce while some of the few firms that offer training say they often lose new drivers to poaching by competitors. 

Construction gains were concentrated in specialty contracting; commercial construction did particularly well. This is an area that relies more on union labor, which provides builders with trained workers. The shortage of skilled construction workers in the residential sector is acute. I know it firsthand as I am working on my 1891 house with an experienced carpenter. It is slow going but worth the wait in this market. 

Manufacturing hiring was solid in May but the real news is where the gains appeared: investment in machinery. Mining activity was also strong but small relative to the total. Unfortunately, both sectors are at risk of losing jobs to rising tariffs and escalating trade tensions. Our largest and closest allies in trade - Mexico, Canada and the European Union - are now coordinating retaliation.

Professional services employment has slowed but remains strong among full-time hires; the number of new temporary hires actually fell during the month, which is unusual and reflects a shortage of workers as well as a commitment to hire full-time. Technical hires led the job gains; the category includes accountanting, computer services, management and technical consulting.

Average hourly earnings rose 0.3%, or 2.7% on a year-over-year basis. That is slightly stronger than we saw earlier in the year but still shy of the 3% target many on the Fed would like to see. The key question in June will be how much and for how long they will allow inflation to overshoot the 2% target in order to get a more sustained increase in wages. Moreover, tariffs add to inflation without increasing wages. Historically, tariffs have cost us many more jobs than they have saved by eroding purchasing power for consumers.

The unemployment rate fell to 3.8%, the lowest level since April 2000, but the drop was for the wrong reasons. Demographics are a problem with the ranks of retirees rising. Participation among prime-age adults (25-54) remains stubbornly low. The only silver lining could be very young women (aged 16-17) who appear to be throwing their hats in the ring again after being pushed out by older, more skilled workers earlier in the cycle. The same is not true for young men or women in the 18-19 year old category.

Bottom Line
Labor markets continue to tighten and the unemployment rate continues to fall. The reasons for the decline are not as encouraging. Or as i like to say, the sequel is not as good as the original. The last time the unemployment rate was this low, the labor force was growing, wages were surging and people who had been considered unemployable were being trained and hired. That is not the case today.

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