September 03, 2024
The July jobs report was considerably weaker than most analysts had expected, with a reported job gain of just 114,000– the weakest since April’s 108,000 – and a rise in the unemployment rate from 4.1 percent to 4.3 percent. The unemployment rate has now risen by 0.9 percentage points (PP) from its low last April. More concerning is the fact that 0.6 pp of this increase has come since January.
With both surveys there are reasons why the news may not be as bad as the first glance numbers indicate. In the case of payroll data, we had a very strong number in May, which meant the three-month average was still 170,000, probably somewhat more rapid than can be sustained in a context of slowing immigration.
In the case of the household survey, the prime-age (ages 25 to 54) employment to population ratio (EPOP) rose in July to 80.9 percent, tying the previous high for the recovery. This is the highest EPOP for prime age workers since early 2001. Hurricane Beryl may have also had some impact on the data, although the Bureau of Labor Statistics reported that the geographic patterns do not seem consistent with the hurricane being a major factor.
Unemployment Should Dip
There is some reason for believing the 0.2 pp jump in unemployment in July was an anomaly. Apart from the possible impact of the hurricane, almost 80 percent of the rise in unemployment was due to people who reported being on temporary layoffs. Usually, when we enter a recession, the bulk of the increase in unemployment is attributable to people who say they have permanently lost their jobs. The fact that prime-age workers are finding it easier to get jobs also does not seem consistent with a weakening of the labor market.
Other data also are consistent with a labor market that remains strong, although weaker than the peak months of 2022. The quit rate of 2.1 percent is down from the peak of 3.0 percent hit in November of 2021 and January of 2022, but only slightly below the 2.3 percent average for 2018 and 2019. The 4.9 percent job opening rate is still above the pre-pandemic peak. The data on weekly jobless claims and continuing claims is above the lows hit in 2022, but again comparable to the data from 2018 and 2019.
The rise in unemployment reported in July, and the 0.6 pp rise reported since January, simply do not seem consistent with other labor market data, including the rapid rate of job growth over this period. It is also worth noting that, taking the unemployment rate to the next decimal, the July rate was 4.25 percent. For these reasons, it is likely we will see a drop of 0.1-0.2 pp in the August unemployment rate.
Job Growth Near 150,000
It is easy to lose sight of how extraordinary the job growth in this recovery has been. Before the pandemic, the Congressional Budget Office (CBO) was projecting that employment would be on average just 3.7 million higher in 2024 than in 2019. It’s actually almost 7.0 million higher, even after deducting 814,000 for the preliminary benchmark revision. CBO projected that payroll employment would virtually stop growing by 2022, due to the retirement of the baby boom generation. It projected job growth of less than 30,000 a month for 2023 and 2024.
As it stands, we have created jobs at a very rapid pace throughout the recovery. Clearly much of this is because of immigration, but due to a strong labor market, native-born workers are also able to find jobs and many people who would likely not otherwise be in the labor market are choosing to work because of the options available.
Anyhow, with the economy still growing at a healthy pace by most measures, it seems unlikely that job growth could have slowed to the pace reported for July. There is always a large random element in the jobs numbers and it is likely that much of the weakness reported for July was simply an anomaly as proved to be the case with the April number, which was originally reported as 175,000.
Hours and Productivity
The length of the average workweek edged down to 32.2 hours, driven entirely by a decline in hours in the goods producing sector. This left the index of aggregate hours unchanged.
There was an increase in average hours early in the recovery, as employers, having difficulty finding workers, had their existing workforce put in more hours. The workweek drifted back to its pre-pandemic level last year. The drop in hours in July could just be a weather-related blip or could indicate real weakening in labor demand. The August data will give us a clearer picture.
The plus side of fewer hours is that it implies more rapid productivity growth. We had another very good productivity number in the second quarter, 2.3 percent. This will be revised up by 0.2 pp based on the GDP revision. The downward benchmark revision will raise productivity growth from the first quarter of 2023 to the first quarter of 2024 by roughly 0.5 pp. If we again see weak hours growth in August that will be a positive sign from the standpoint of productivity.
Wage Growth
As the Fed now seems likely to begin to turn to rate cutting, it will be closely following the path of hourly wage growth. This was down to 3.6 percent in July, both year-over-year and an annual rate over the last three months. This is only slightly higher than the 3.4 percent rate in 2018-2019. There should be little concern about this sparking inflation, especially since profit margins remain elevated compared to their pre-pandemic level.
Unemployment Rates for Blacks and Hispanics
As the overall unemployment rate was hitting a half-century low last spring, the unemployment rate for Blacks hit a record low, while the unemployment rate for Hispanics tied the low hit before the pandemic. The 6.3 percent July rate for Black workers is 1.5 pp above the 4.8 percent low hit in April of last year. The 5.3 percent unemployment rate for Hispanics is 1.4 pp above the 3.9 percent low reached in September of 2022. (These rates are volatile, but it’s clear there has been a substantial increase from lows hurt earlier in the recovery. If we see a drop in the overall rate in August, we should see some declines for these and other disadvantaged groups.
August Should Reverse July’s Weakness
With most other indicators suggesting that the labor market remains healthy, and most other economic metrics showing growth is still strong, we should get a solid jobs report for August. Ideally, we will see steady job growth with the unemployment rate reversing some of its recent rise.
