August 01, 2023
July Jobs Preview: What to Expect in the July Jobs Report
With the good news on growth and inflation last week, the most important item in the July jobs report will likely be the pace of wage growth. If this is running at a level consistent with the Fed’s 2.0 percent inflation target, it will be hard to justify future rate hikes.
In addition to the jobs numbers, it will also be important to pay attention to the length of the workweek. As a result of shorter workweeks, the index of aggregate hours in June was only 0.2 percent above its January level. This could indicate some weakness in the demand for labor, although there is no evidence of this in the job growth or employment data.
The Employment Cost Index for the second quarter showed wage growth slowing to a 4.1 percent annual rate. This is roughly the same as the recent pace in the average hourly earnings series. This pace of wage growth is only slightly faster than what we saw in 2018-2019 when the inflation rate was at the Fed’s 2.0 percent target. If we continue to see wages growing at this pace, the Fed can be reasonably confident that inflationary pressures are limited, and that we are moving toward the Fed’s target.
The pace of job creation continues to be somewhat faster than is generally believed to be consistent with the growth of the labor force. However, the pace of job creation is clearly beginning to slow. The 209,000 job gain reported for June was the smallest gain since a drop of 268,000 reported for December of 2020.
It is worth noting that the private sector accounted for only 149,000 of the June gains. Private sector job growth has been under 200,000 for four of the last five months, indicating that the demand for labor is definitely cooling. (The flip side is that the public sector is making up some ground, after employment growth had badly lagged the private sector earlier in the recovery.)
It will also be important to pay attention to the revisions in the July report. The combined revisions for the prior two months in June subtracted 110,000 jobs from previously reported job growth. The revisions to the data have been unusually large throughout the recovery, in many cases leading to a qualitatively different view of previous months’ data.
Length of the Workweek
The slower pace of job growth in the private sector has gone along with some reduction in the length of the average workweek. As a result, the index of aggregate hours was just 0.2 percent higher in June than in January, even though private sector employment had risen by 0.7 percent over this period.
The largest declines in the length of the workweek have been in non-durable manufacturing, where it has fallen by 1.8 percent since January, and retail and hotels and restaurants, with a drop of 1.6 percent. This could be a story of labor hoarding, where employers keep more workers on the payroll than are needed because of the difficulty in hiring more workers. That could be what is taking place now. At the very least, it means that employers are not having the same problems finding workers as they did earlier in the pandemic, when the length of the workweek was considerably longer than it had been before the pandemic.
Hours and Productivity
The weakness of hours growth, combined with a decline in self-employment, led to a strong productivity growth number for the second quarter. The quarterly growth data are highly erratic, so a strong quarter does not mean much, especially since reported productivity fell in the first quarter.
However, it is worth noting the patterns in aggregate hours. If the economy maintains the recent pace in GDP growth, with limited growth in hours, it would imply some pick-up in the pace of productivity growth. This both helps to contain inflation and provides the basis for rising living standards.
Labor Force Participation Rate
The labor force participation rate (LFPR) for prime age workers hit another post-pandemic high in June, with the rate for women hitting another all-time high. If the LFPR for prime age workers continues to rise it is both good news for workers, but also means that the economy has more room to expand.
The Black unemployment rate hit a record low of 4.7 percent in April, but then rose sharply in the next two months to 6.0 percent. The monthly data are erratic, so the April rate may have understated to some extent the true Black unemployment rate, while the June rate may overstate it. We will get more insight on this issue with the July report.
Involuntary Part-Time Employment
There was a big jump of 452,000 in the number of people who reported that they were working part-time for economic reasons in June. This followed two months of declines, but the June number was still 89,000 higher than the March figure. The July report will tell us whether the jump seen in June was an anomaly or in fact we have a higher number involuntarily working part-time than in the spring.
Continued Growth in State and Local Government Employment
We have seen more rapid growth in state and local government employment in the last five months as private sector job growth has slowed. As noted earlier, government employment had lagged behind private sector employment in the recovery, with both state and local employment still somewhat below pre-pandemic levels.
This is likely because it is more difficult for governments to adjust pay and benefits to make jobs more attractive. That means that the government was losing out to the private sector when the labor market was very tight. But now that the labor market has eased somewhat, governments are better able to compete.
Strong Stable Labor Market
The economic news in recent weeks has been almost entirely positive, with the economy showing considerable strength even as inflationary pressures wane. The June employment report largely fit that picture, even if the pace of wage growth may have been somewhat too high to be consistent with the Fed’s 2.0 percent inflation target.
It seems likely that we will again get solid numbers on job growth and unemployment. Certainly, the weekly unemployment insurance claims data provide no sign of a weakening labor market. The biggest question with regard to the establishment survey will be whether the pace of job and wage growth has slowed to a stable non-inflationary rate. On the household side, it will be whether we continue to see gains on LFPR and a drop in the Black unemployment rate.