Preview: Will Job Growth Remain Strong in a Slowing Economy?

08/02/2022 9:27am

(The monthly Employment Situation is scheduled for release by the Bureau of Labor Statistics on Friday, August 5th, at 8:30 AM Eastern Time.)

The drop in second quarter GDP led to widespread talk of recession. It is clear that the economy is slowing, both because the vast majority of workers who lost jobs in the pandemic have already been reemployed, and because the Federal Reserve Board is explicitly trying to slow the economy with interest rate hikes.

Thus far, we have not yet seen clear evidence of slowing in the labor market, with the economy creating 372,000 jobs in June. This is likely to change. While still quite low, weekly unemployment claims are considerably higher than the numbers seen in the winter. Also, many large firms, especially in the tech sector, have been announcing layoffs or hiring freezes. It would be surprising if we did not see substantially slower job growth in July instead of the soaring pace seen in the first half of 2022.

Is Wage Growth Continuing to Moderate?

This, in many ways, is the most important question that will be answered in the July report. The rate of growth in the average hourly wage has slowed sharply from the end of 2021 through the first half of 2022. It was growing at a 6.1 percent annual rate, comparing the three months of November, December, and January with the three months of August, September, and October. Taking the most recent three month periods (April, May, June) compared with the prior three (January, February, March), the annualized rate of wage growth was just 4.3 percent.

This slowing is a huge deal for two reasons. First, we obviously are not seeing the widely feared 1970s-type wage-price spiral if wage growth is slowing. Second, the 4.3 percent is not too out of line with the Fed’s 2.0 percent average inflation target. In 2019, when inflation was comfortably below this target, wages grew at a 3.4 percent rate. If wage growth stays in this range or slows further, it will mean the Fed’s work is largely done.

The Employment Cost Index and the Average Hourly Wage

The wage data in this report will be especially important because we do not see any evidence of slowing wage growth in the Employment Cost Index (ECI). Usually, the wage component of the ECI tracks closely with the average hourly wage series. However, it showed considerably slower wage growth than the average hourly wage series last fall. Now, it is showing more rapid growth, with the wage component rising at a 5.7 percent annual rate in the second quarter for all workers and a 6.5 percent rate for private sector workers.

There are two possible explanations for the divergence between the ECI and the average hourly wage series. One possible explanation for the more rapid rise in the average hourly wage series last fall is because the ECI holds the mix of workers constant, workers were effectively getting pay increases by changing job titles. A worker promoted to assistant manager has more money in their pocket, but this promotion does not appear as a pay increase in the ECI.

The other less obvious explanation is if more people are being hired in lower paying positions, we could see this sort of gap. However, it would take considerable skewing to see a gap that could be more than 2.0 percentage points. As it is, we have to be somewhat uncomfortable with these two series showing such large differences in the rate of wage growth.

The Divergence Between the Household and Establishment Surveys

Many analysts have noted that, even while the establishment survey continues to show rapid job growth, the household survey has shown a decline of 347,000 in the number of people employed over the last three months. This is striking, but not that unusual.

The household survey often has quirky changes in employment that do not seem to correspond to anything actually going on in the economy. Over the last year, the household survey shows somewhat faster employment growth than the establishment survey: 6,499,000 more employed people in the household survey compared to 6,282,000 more jobs in the establishment survey.

Unemployment to Edge Lower

The unemployment rate has been stuck at 3.6 percent for the last four months, just 0.1 percentage points above its 50-year low. Job growth has certainly been fast enough in these months to push the unemployment rate lower, but we have not seen any decline.

There is always some amount of random error in the household survey. We can expect it to often come within 0.1-0.2 percentage points above or below the actual unemployment rate, leaving the substantial probability that it will tick down by 0.1 percentage point even if there is no change in the actual unemployment rate. (Of course, it can also tick up.)

Labor Force Participation Rates

The labor force participation rate (LFPR) for prime age workers (25 to 54) is back to its year-round average for 2019, but still below pre-pandemic peaks for both men and women. It is likely that, even with a slower pace of job growth, we will see some increase in the LFPR in July. The LFPR in June was 0.8 percentage points below its pre-pandemic peak for prime age men and 0.5 percentage points for prime age women.

Share of Unemployment Due to Voluntary Quits Likely to Remain Stable

The share of unemployment due to voluntary quits in the recovery peaked at 15.1 percent in February. It then fell in subsequent months before rising back to 14.0 percent in June. This share is consistent with a strong labor market, but below both the peak hit in February or the levels seen at the end of the 1990s boom. If this share remains near 14.0 percent, it should lessen concerns about an overheated labor market.

Self-Employment Likely to Remain High

There was a big surge in self-employment at the start of the pandemic. This presumably was because millions of people had lost their jobs during the shutdowns. Furthermore, many people did not want to risk infection by going to work, so the idea of having a home-based business was highly attractive.

However, the rise in self-employment has persisted, even as the pandemic has largely come under control and the unemployment rate has fallen to near 50-year lows. At this point, self-employment is a choice, not a path followed out of necessity. (For many women, the inability to get quality childcare may be a limiting factor in taking a standard job.)

July Should be Another Good Month, Albeit with Slower Growth

With the labor market pretty much back to its pre-pandemic state, we should be seeing job reports that look more normal. This means a much slower pace of job gains, and little month-to-month change in the unemployment and employment rates.

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