Jobs growth is slowing, despite the big June gain

Despite a stronger-than-expected June gain of 191K private nonfarm payrolls (+191K vs +150K), private sector jobs growth—when measured over multi-month periods—has slowed from a Dec. '18 high of 2.3% to now as low as 1%. That's the weakest growth in over 8 years, but it's nothing to get worried or excited about. (Jobs data are notoriously volatile on a month-to-month basis, so you have to put more emphasis on multi-month trends. The June print may sound impressive, but it only extends this year's trend towards weakness.)

The slowing jobs growth that has emerged this year is neither a precursor nor a harbinger of a coming recession, so the Fed needn't feel any sense of urgency. Jobs growth is slowing not because the economy is slipping into a recession, but because some businesses are having trouble finding new workers and some are uncertain about the future given Trump's ongoing tariff wars. Slow-to-modest jobs growth combined with extensive evidence of low and relatively stable inflation (1.5 - 2.0%) and concerns that tariff wars could weaken the global economy add up to a justification for at least one rate cut, probably at the July 31st FOMC meeting.

Chart #1

Chart #1 shows the monthly changes in private sector payrolls (which are far more important than changes in government payrolls, since the private sector is the ultimate source of growth). Over the past six months jobs growth has averaged 169K, and in the most recent 5 months, gains have averaged only 134K (which latter translates into 1% annualized growth). Yet despite the recent weak growth of jobs, productivity has been running at roughly 2% per year of late, so jobs growth of only 1% can still result in overall economic growth of about 3%. With the Fed likely to oblige the market with another ease, there is little reason to worry that the economic outlook is anything but healthy.

Chart #2

Chart #2 shows the 6- and 12-month percentage change in private sector jobs. By either measure, jobs growth this year hasn't been this weak for over 8 years. The 5-month annualized growth of jobs has plunged to a mere 1%. Still, nothing to worry about. The economy's financial fundamentals are still quite healthy, as evidenced by very low swap spreads, low credit spreads, and abundant liquidity.

Chart #3

Chart #3 illustrates an under-appreciated fact about the current business cycle expansion: while private sector jobs growth has been impressive, public sector jobs have experienced a net loss. The ratio of public-to-private sector jobs has now fallen to 15%, which is the lowest it has been since 1957! (The ratio maxed out at 19% in mid-1975.) With public sector jobs flat in absolute terms but way down relative to the size of the economy, this gives the private sector some much-needed "breathing room" to continue expanding, if for no other reason than this: the public sector is not a serious competitor for the relatively scarce supply of available workers.

Chart #4

Chart #4 shows the number of part-time workers (blue line) and the ratio of part-time workers to total private sector employment. What stands out is the huge decline in the portion of the workforce that is working part-time. Full-time jobs have expanded at a much faster rate, and that points to a relatively healthy jobs market; businesses are confident enough in the future to seek out and hire full-time workers.