Friday, July 5, 2019

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.


Benjamin Cole said...

Another great post by Scott Grannis.

I may take exception to the idea that business hiring has slowed as there are not enough workers. There is just the slightest inflation in wages, presently. I think if there were truly a "worker shortage" plus a healthy economy, we would see some wage inflation. It just ain't there, year after year. (In fact with 2% productivity gains, presently wages are a drag on the Fed's 2% inflation target. That is, labor costs are rising at about 3% annually, but productivity at about 2%. So, you are seeing 1% inflation in unit labor costs).

(Sorry, add on: . According to this FRED chart, unit labor costs are actually lower---lower!---in Q1 2019, the latest read, than in Q1 2018.)

Falling unit labor costs do not jive with "worker shortages" yet strong aggregate demand for labor.

My own take is that U3 and other federal measures of unemployment do not capture something about the modern economy, Maybe it is people in "gig" jobs who will take a good job when offered, or part-timers who want more work, or seniors returning to work as someone gave them call (in my age bracket this happens to friends).

I sure hope the Fed does not, yet again, err on the side of "fighting inflation." As I have said many times, nothing would be a better tonic for America than a couple generations of "very tight" labor markets.

Grechster said...

I've thought for a while now, and the latest jobs report underscored it, that the pool of available workers is greater than the stats capture. I think this explains the dynamic of incredibly low unemployment along with rising-but-not-so-much wages; too, this is consistent with a TIPS market that STILL doesn't see any meaningful inflation.

The latest report plausibly gives the Fed the opening to be dumb (as it would be if it doesn't cut rates, and the more the better). I'm with Benjamin - I sure hope they don't.

In related news, Trump is right again - for all the wrong reasons, perhaps - about the strength of the dollar. I know we shouldn't run monetary policy based on short-term exchange rates but a decrease in the dollar would be another positive effect of a rate cut, IMO.

Benjamin Cole said...


Trump's vulgarian persona belies his many correct takes on policy.

His macroeconomic policies, and his hounding of the Fed, I think are roughly right. I would have cut taxes on wage-earners more, but corporate income taxes are a good tax cut.

The Fed, and other central banks, have ossified around "inflation fighting." Remember, these are independent public agencies---not accountable. A perfect recipe for inbreeding and industry capture.

Ray Dalio is asking very insightful questions about central banking. He posits that continuous QE or money-financed fiscal programs will have to become part of the mix. A guy named Adair Turner agrees.

I suspect Dalio is right, but these sorts of policy issues some to have very intelligent and earnest people on all sides of the question.

randy said...

Regarding Trump "takes" - it's a mistake to view any of his takes you might agree with as evidence of anything other than coincidence. His reasons for acting one way or another... well you'd need clinical psychologists to answer that complicated question. Yes I am a conservative, but I can't wait for his time to pass.

steve said...

I'm with you Randy. That said, DT's approval is at all time highs (don't shoot the messenger). Barring a recession before 11/20, he wins. The dem candidates are so uber left they are screwing themselves in a general election. Moreover, dopey Joe is already mis speaking himself out of the race MEANING the left will nominate a real loon. NO chance.

Of course, I thought Trump had no chance in '16 so...

Benjamin Cole said...


"Of course, I thought Trump had no chance in '16 so..."


I suspect if the Donks want to re-hash and do a circular firing squad on race-relations, they will lose, especially if Trump keeps talking about jobs in the USA. Open borders is probably not a winner either (I love legal immigrants, btw). I find the identity politics of the Donks offensive.

But Trump is his own worst enemy too.

I will say this: After Trump. the White House is going to a lot less interesting.

randy said...

Yeah, I can't believe the democrats are screwing this up so bad. Crazy world. Trump is driving dems so crazy, that they allow the craziest left fringe to take the lead - which will help re-elect Donald. He's not my executive of choice, but gotta admit he is a master at mind games. "After Trump. the White House is going to a lot less interesting." As you say, verily.

terex said...

Graphs 2, 3 n 4 are great! Thanks!

Soaring Eagle said...

Its easy to see how Trump won - the media and most just don't understand - ITS A REVOLUTION - the REVOLUTION is on!! The majority have had it with POLITICANS!!

Predicted Trumps victory 6-7 months before Nov/16. Have a feel for the MARKETPLACE.

My position on Trump now - he doesn't tweet enough and not tuff enough. With MSM 95% against him, he MUST tweet-tweet-tweet. WE LIKE TO WIN!! Under Obama GDP averaged 1.9%/8 years - Trump has it up to 3% for 2019. Tax cuts-killing regs - exploding hurdles in way of ENERGY - taking on China's attack on us.

No politician is capable of this success. A politician's goal is to get reelected not to do what's BEST!!!


Trump will win 99 to 1 odds in 2020.

John A said...

Here is annual GDP growth:

2017 = 2.2%
2018 = 2.9%

Nothing different than what we saw under Obama.

Ataraxia said...

Cut as soon as inflation starts to perk up a bit above target? Looks like we may be in for some "symmetrical" above target inflation. Total mixed bag at this point.

Johnny Bee Dawg said...

Inflation is perking up above target?
Didn't Core Inflation just drop from 2.2% last year to 2.1% this year?

Does the inversion at the front end of the curve indicate inflation perking up?

The Cliff Claven of Finance said...

John A. said:
"Here is annual GDP growth:

2017 = 2.2%
2018 = 2.9%

Nothing different than what we saw under Obama."

Obama averaged+1.5% over eight years = pitiful

If you ignore the recession months in 2009, it's +2.2%

Trump averaged +2.55% in 2017 and 2018

That's much better than +1.5%
and somewhat better than +2.25

Both presidents had the problem of
the slow growth of the labor force.

steve said...

My goodness I have to agree 100% with Cliff!

Benjamin Cole said...

Worth worrying about

Bob said...

About the comments about Trump. Ok, he's a little odd. Well maybe not even a little. I suspect he is a bit of a bully and some what narcissistic (but nothing like Obama's narcissism).He's certainly not an orator, nor would I categorize him as an intellect, but he's not stupid either. He's a bit of a bull in a china closet (not meant to be pun'ish). He may even fart loudly.

The media, academia, big business, may all detest him but that's only because they can't control him. The issue isn't Trump, it's that there's nowhere or no one to counter him. Will any truly red blooded American, and I mean all races, genders, creeds, immigrants, etc with an ounce of wisdom (forget intellect, much overrated IMO) vote for any of the donk's candidates? My God, what happened to this country. It's still what?, 16 months to Nov. 2020. Anything is possible, but as it stands now, if any of the current crew of donkeys wins, then we have truly lost our Republic and our minds

John A said...

The previously reported quarter-over-quarter GDP growth at Q4 last year of 3% has now been revised down to 2.5%: