August 31, 2023
The labor market has continued to remain surprisingly strong, with the economy averaging 218,000 new jobs a month over the last three months. The unemployment rate remains near its half-century low, and wage growth is substantially outpacing inflation.
The biggest concern in the August report is that the wage growth could be too rapid, leading to a risk of reaccelerating inflation. This would likely lead the Fed to raise interest rates further, which could bring on the recession that had long been predicted by many forecasters.
The average hourly earnings (AHE) series has been an outlier in that it has shown some acceleration in recent months, whereas most measures of wage growth have been showing the pace slowing back towards its pre-pandemic rate. The annualized rate of wage growth in the AHE over the last three months has been 4.9 percent. That is up from 3.4 percent in the three months ending in March.
By contrast, the rate of inflation in the Employment Cost Index has slowed to an annual rate of 4.0 percent in the second quarter, down from 6.0 percent in the third quarter of 2021. The slowdown in the wage component has been even sharper, slowing from 6.4 percent in the third quarter of 2021 to 4.0 percent in the most recent data.
This is similar to the story we get from the rate of compensation growth in the BLS productivity and cost data. The quarterly data are sufficiently erratic to make them pretty much worthless, but taking the year-over-year rate of growth in hourly compensation, there was a decline from a 10.3 percent rate from the second quarter of 2019 to the second quarter of 2020, to just 3.7 percent in the most recent quarter. This also would be in the ballpark of a pace consistent with the Fed’s inflation target. Most private indexes of wage growth have also shown a sharp slowing.
The monthly AHE data are erratic and also subject to large revisions. Nonetheless, another month where the rate of wage growth is near 5.0 percent will be a cause for concern. Wages have not been driving inflation, as there was a shift to profits since the pandemic, but if the rate of wage growth remains near 5.0 percent, it is hard to imagine this won’t be passed on in more rapid inflation.
Hours and Productivity Growth
Productivity growth is always erratic, but in the period since the fourth quarter of 2019, it has been roughly in line with its pre-pandemic average.
Productivity grew at a very strong 3.7 percent rate in the second quarter, but that followed a 1.2 percent reported decline in the first quarter.
While employment growth has remained strong, aggregate hours actually fell at a 1.3 percent annual rate in the second quarter. This was due to both a shortening in the length of the average workweek and a decline in self-employment. The index of aggregate hours fell again in July. If we see another fall or weak growth in hours in August, it is likely to mean another quarter of strong productivity growth. That will help to alleviate inflationary pressures, as well as leave room for more rapid wage growth.
The shortening of the workweek also raises important questions. Clearly employers no longer feel a need to require workers to put in more hours as an alternative to finding additional employees. There could be an issue of labor hoarding, which often happens in a downturn, but we don’t see this in the goods-producing sector, where it typically occurs. The hotels and restaurant sector has seen one of the sharpest reductions in workweeks. This could be a story where employers, who had great difficulty finding workers earlier in the recovery, feel more need to retain them now and therefore reduce hours rather than lay off workers.
We are likely to see further slowing in employment growth, with another figure under 200,000. The slowing has been uneven, with some sectors, notably non-durable manufacturing, actually shedding jobs. Manufacturing is a highly cyclical sector, although usually durable manufacturing is more sensitive. Durable manufacturing has continued to add jobs in recent months.
Health care has been adding jobs at a very rapid pace. Its 63,000 gain in July accounted for almost 40 percent of private sector job growth in the month. This rapid growth is likely to continue in August.
There was a 19,700 drop in employment in state education in July. This was probably an issue of seasonal adjustment as the timing of summer vacations has been shifting. If that is the case, we should expect to see strong job growth in the sector in August.
The preliminary benchmark revisions for March 2023 were released last week and they showed an upward revision to government employment of 52,000. This will bring state and local government employment closer to their pre-pandemic level, but it is still down by roughly 200k or 1.0 percent. (The revisions will not be added to the data until the final version is available with the January jobs report.)
Labor Force Participation Rates for Prime Age Workers Likely to Edge Higher
The overall labor force participation rate (LFPR) remained at 62.6 percent for the sixth straight month in July, but it edged down 0.1 pp for prime age workers (ages 25 to 54) to 83.4 percent. This decline was due to a drop of 0.3 pp to 77.5 percent in the LFPR for prime age women, from the record high hit in June. That outweighed a small rise in the LFPR for prime age men to a post-pandemic high of 89.4 percent, which is still 0.2 pp below the pre-pandemic peak. We are likely to see a modest rise in the LFPR for prime age women in August.
Black Unemployment Likely to Edge Lower
The Black unemployment rate hit a record low of 4.7 percent in April, and then rose sharply over the next two months to 6.0 percent in June. It fell 0.2 pp in July to 5.8 percent, but that is still more than a full percentage point above its April low. The Black teen unemployment rate has risen sharply over this period from 12.9 percent in April to 20.7 percent in July. The monthly data are highly erratic, but we may see some further declines in August.
Another Solid Report, Wage Pressure Is Big Question
We should expect to see another solid jobs report with little change in the unemployment rate. The biggest questions will be whether wage growth is moderating or reaccelerating, and whether there is evidence of more rapid productivity growth. A more moderate wage figure, coupled with continued slow growth in hours worked, would be encouraging news.