August Employment Could Fall Short

Payroll employment is expected to rise by 160,000 in August but the risks are to the downside. Manufacturing employment contracted in the August index from the Institute for Supply Management (ISM). Export orders hit the lowest level since 2009 when global trade was contracting; several plants in the vehicle industry closed for good at the end of July.

The demand for long-haul truck drivers has softened with higher tariffs and the slowdown in exports. This is at the same time that bankruptcies in the shale industry have surged, which means fewer jobs in mining.

Retail hires are likely to continue to fall as consumers shift more of their spending to online from brick-and-mortar retailers. Labor shortages in the leisure and hospitality sector are stemming gains there. (Cleaning personnel are particularly hard to find, as those jobs historically were filled by immigrants.)

The only place we could see an upside surprise is in government hires. Hiring for the 2020 census is running behind schedule, but most of the regional Census offices were slated to open by August. Teacher hires are another wildcard, although it looks like some of the staffing that we usually see in August already occurred in July.

Average hourly earnings are expected to remain unchanged in August after moving up sharply in July. That will hold the year-over-year rise in wages to the 3.2% pace we saw in July, which is good, but not spectacular. Average hourly earnings have come off the 3.4% peak hit in February. The good news is that much of the acceleration in wages we are now seeing is occurring among the lowest paid workers, which shows up almost immediately as consumer spending.

The unemployment rate, which is calculated from the household survey, is expected to hold at 3.7%. The low for unemployment during this cycle is 3.6%; the plateau in the unemployment rate is important to watch as it could indicate an inflection point. Research at Brookings shows that if the unemployment rate rises 0.5% above that low for three months (to 4.1%), then the economy is already in a recession.

The Federal Reserve is widely expected to cut rates again in September. A slightly cooler employment report, however, will not be enough to sway those who dissented over cutting rates when the Federal Open Market Committee (FOMC) met in July; four participants pushed back on interest rate cuts at that meeting. Two were voting members of the FOMC and are expected to dissent again, barring a sharp deterioration in economic and financial conditions over the next two weeks.

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