September 06, 2024
The August employment report showed a modest drop in the unemployment rate to 4.2 percent. While this is a trivial decline, it comes after the rate had risen by 0.6 percentage points from 3.7 percent in January to 4.3 percent in July, raising concerns about a possible recession. The drop in August should help to push back these concerns.
The rate of job growth also rebounded somewhat, from an originally reported 114,000 for July (revised down to 89,000) to 142,000 in August. This is in the ballpark of what most analysts would consider a sustainable pace of job growth.
July Weakness May Have Been Partially Attributable to Weather
Many of us speculated that the rise in unemployment reported in July and other signs of weakness may have been partially attributable to the impact of Hurricane Beryl hitting Texas. BLS reported that its analysis of the data did not find evidence of the hurricane having a measurable impact.
Nonetheless, some of the anomalies from July were reversed in August. Notably, the 2.7 percentage point rise in the share of unemployment due to people on temporary layoffs was almost completely reversed in the August data. Similarly, the 0.1 hour reduction in the length of the average workweek was reversed in the August report. Whatever the reason, it seems the July report gave an unduly weak picture of the labor market.
Hours Rise, Productivity Growth Should be Strong in the Third Quarter
Yesterday, BLS revised up its estimate of productivity growth in the second quarter to 2.5 percent, bringing growth over the last year to 2.7 percent. It looks like we could have another good quarter of growth. While the index of aggregate hours rose in August, it mostly reversed the fall in July. The average for the index thus far this quarter is at 116.4 – almost exactly the same as the average for the second quarter. With GDP growth likely to come in over 2.0 percent for the quarter, this should translate into another quarter of healthy productivity growth.
Wages Grow at a 3.8 Percent Rate
The annualized rate of hourly wage growth over the past three months was 3.8 percent, the same as its rate over the last year. The pace of wage growth has changed little over the last year and a half. The stability of wage growth over a relatively long period is another factor that should alleviate concerns about inflation.
A 3.8 percent pace of wage growth should be consistent with the Fed’s 2.0 percent target, especially if productivity growth remains strong. Also, the profit share still has not reverted to its pre-recession level, which means there should be some room for wages to rise at the expense of profits. With year-over-year inflation likely to be around 2.6 percent in August, the current rate of nominal wage growth translates into a healthy 1.2 percent rate of real wage growth.
Manufacturing Loses 24,000 Jobs, but Construction Adds 34,000
Manufacturing and construction have historically been the two most cyclical sectors of the economy, so if we are worried about a recession we would likely see evidence of weakness in these sectors. Manufacturing did show a substantial job loss in August after showing little clear direction for the last year and a half.
Half of the manufacturing job loss came in the transportation sector, but only 5,900 of the 12,000 job loss was due to the motor vehicle sector. Insofar as the airplane industry contributed to this drop, it is almost certain to be temporary, as orders for planes have been strong.
Construction continues to have healthy job growth driven largely by a record pace of factory construction. With interest rates dropping, it also looks like housing construction will be picking up in the months ahead.
Healthcare Job Growth Slows Sharply
Job growth in the healthcare sector slowed to 30,900 in August, down from an average of 57,000 over the last year. This is a mixed story in the sense that healthcare has been an important source of employment growth for the last several decades. On the other hand, more rapid job growth is likely to translate into higher healthcare costs.
The restaurant sector added 29,900 jobs in August, well above its average of 12,000 over the last year. The government sector added 24,000 jobs, almost all of it accounted for by an increase of 22,000 local government jobs.
EPOP for Prime Age Workers Remains at Post-Pandemic Peak
In spite of the rise in unemployment this year, one very encouraging sign in the labor market is that the employment-to-population ratio (EPOP) for prime age workers (ages 25 to 54) remains at 80.9 percent, its post-pandemic peak. This is the highest level since 2001, indicating that this group of workers is having little difficulty finding jobs.
Mostly Positive Report, with Some Signs of Weakness
The basic takeaway from the August report has to be positive, most importantly from the drop in unemployment. While the drop was small, at least for now unemployment does not seem to be headed on a continuous upward path.
The rate of job growth in the August report is considerably slower than what we had been seeing earlier in the year, but it is likely a pace that should be consistent with a stable unemployment rate. Wages continue to grow at a moderate pace that is consistent with the Fed’s inflation target.
All of this is very good; however, the sharp downturn in manufacturing employment provides some grounds for concern, as does the rise in involuntary part-time work. As a logical matter, if the economy as a whole is generating jobs at a moderate pace, there will always be some sectors that aren’t adding jobs, or losing them, as opposed to a situation like 2022 and 2023 where almost every sector saw rapid job growth. From this perspective, the loss of manufacturing jobs is bad news, but not necessarily an omen of worse things to come.
