Jobs Headlines Understate Employment Strength

Payroll employment rose 157,000 in July, less than expected, but coming off substantial upward revisions for the months of May and June. It is critical not to make too much of the monthly blip in the data given those upward revisions to the prior two months.

The largest “miss” in the data was in retail. Sporting goods and hobby stores lost nearly 32,000 jobs as Toys "R" Us shut their doors. Another shortfall was in local government jobs, which declined by 20,000 as teachers left the payrolls. Many of those jobs should come back next month. It is notable, however, that teachers were among the hardest hit by the financial crisis and are still lagging in wage growth. Local governments are beginning to feel the pinch of unfunded pension obligations. Federal spending is picking up, which should provide some offset for those losses going forward.

On the bright side, professional services employment, which includes new college graduates, picked up. We saw gains in both full-time and temporary hires. Temporary employment had weakened over the last year as firms scrambled to find more full-time workers. We are seeing strong hiring in sales and administrative support staff. The latter two were drivers of wage gains in the employment cost index for the second quarter.

Manufacturing posted solid gains. Heavy trucks and motor vehicles accounted for the largest gains. Next were machinery and fabricated metals. Tariffs are a plus for fabricated metals producers. Users of steel and aluminum, however, have warned of major price hikes in the months to come, which could slow their sales. Vehicle sales tanked in July, which suggests we could see some pullback in the months to come.

Construction employment continued to rise but not as much as one would hope, given the shortfall in the supply of housing. Specialty contractors led the gains but are facing the biggest shortages. Many experienced carpenters have either retired or left the country since the housing bubble burst.

Average hourly earnings rose 0.3%, in line with expectations. Year-over-year gains remained stuck at a somewhat disappointing 2.7%. Many factors have contributed to sluggish wage growth, including a loss in bargaining power among workers relative to owners of capital. Manufacturing wages have actually decelerated sharply because producers have moved down the scale, opting to train lower skilled workers. Many companies have reported that they are breaking down higher skilled and higher paid jobs into several lower paid jobs. This has supported job gains but suppressed overall wage gains.

The shift down in skills was also seen in the labor force participation rate. An increase in participation among the lowest skilled workers, high school dropouts and those with some college education, offset a slight decline in the participation rate of college grads. Women increased their participation in the labor force while while men pulled back a bit.

The unemployment rate ticked down by 0.1% to 3.9% in June after moving back up to 4% in June. We expect the unemployment rate to fall to 3.5% by year-end. That would put the unemployment rate at the lowest level since the height of spending on the Vietnam War in 1969, just prior to a recession that took root that year.

Bottom Line
A month does not a trend make; the overall hiring environment remains strong. Wage gains, however, continue to disappoint and now lag overall inflation. Price hikes tied to tariffs are likely to exacerbate that dynamic in the third quarter, which will leave the Federal Reserve raising rates without the wage gains that usually accompany inflation.

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