By Steven R. Drexel, President and CEO of the Cornerstone Staffing Solutions, Inc. family of companies
On Friday May 4th, the Bureau of Labor Statistics (“BLS”) released its monthly summary of labor market activity covering April 2018. This report had a number of eye opening parts worthy of exploration. The headline jobs growth number was below expectations while the movement in the unemployment rate was better than expected and finally the change in average hourly earnings was disappointing. Let’s explore these elements individually in more depth.
The employment growth figure at 164,000 net new jobs was moderately shy of the 190,000 that was expected. There were some mitigating factors in that revisions to the prior two months added 30,000 to the cumulative total. Additionally, April was objectively colder than usual resulting in below trend growth for the weather sensitive employment segments (construction, retail and leisure-hospitality). Factoring in the potential for a positive revision and compensating for the weakness related to weather, it is easy to see a bridge back to the expected 190,000 net new jobs. Further, looking back over the four months of 2018, the average monthly rate of growth is 200,000 net new jobs. So job growth fully considered is fine despite April’s soft looking headline number.
The unemployment rate declined by a more than expected two tenths to 3.9 percent in April. This movement is misleading because, according to the household survey, the number of employed persons increased by only three positions whereas, 236,000 net folks left the labor force (for retirement, disability, family responsibilities, school, etcetera). So, there were fewer unemployed not because there were more working but rather because fewer were looking for work. For the health of the economy, we’d prefer to have more people working and more people joining the labor force – so April’s improvement is not as positive as the headline result suggested. That said, the unemployment rate is and has been quite low by historical standards.
Average hourly earnings during April indicated that wages grew by 2.6 percent on a year-over-year basis. This was slower than expected for April and slower than what was originally reported for March. Under normal circumstances, when the unemployment rate is below 4 percent, economists would expect wage gains to exceed 4.0 percent. It is certainly unfortunate that workers have not seen stronger wage gains during this long expansion. On the other hand, it is often higher wage inflation that sets off a series of events that leads to a recession. There is some consolation in that, in exchange for lower wage growth, employment has grown for a record number months and unemployment across many dimensions is at a 17-year low. Possible explanations for the absence of wage growth include the observation that productivity growth during this recovery has been weak. Theoretically, improvements in wages, as well as the overall standard of living, are highly dependent on productivity growth. A second explanation for the relatively week wage growth involves demographic changes. As large numbers of baby boomers, at relatively high pay rates, retire and are replaced by newer less experienced entrants into the labor force, this depresses the growth in the average wage. Further, the baby boomers still represent a large segment of the workforce and at this point in their careers, they tend to trade off pay increases for things they care more about like security, temporal flexibility and other quality of life factors. A third factor depressing wage growth is the effect of global competition which suggests that work shifts to lower wage locations when domestic wages grow too fast.
The broadest measure of unemployment that includes those marginally attached and working part time for economic reasons improved to 7.8 percent, a two-cycle low. The gap between the narrowest and the broadest measures of unemployment were very high at the start of the current expansion and remain slightly elevated suggesting that there remains some slack in the labor market. The labor force participation rate declined for the second consecutive month to 62.8 percent, another metric suggesting that there is slack remaining in the labor market. The share of the population that is employed also declined to 60.3 during April. This metric took a huge hit during the great recession and while there has been improvement, the recovery is incomplete.
Focusing on prime-age workers (25-54 years old) corrects for the growing influence of the aging baby boomers that are causing the workforce to be older on average, which likely suppresses the collective rates of employment and participation. Focusing on prime-age workers also corrects for the younger segments of the population who continue in school or career training. The median duration of unemployment provides insight into how easy it is for unemployed workers to re-enter the workforce. Collectively, these less-followed series can provide insight into the capacity of the labor force or its ability to continue growing despite the long-running expansion and low headline unemployment.
- The labor force participation rate for prime-age workers contracted by one-tenth of a point to 82.0 percent, this is still below the high of 83.4 percent at the end of the last expansion during January of 2007;
- Seventy-nine point two percent of prime-age workers were employed during April, down slightly from March yet still below the 80.3 percent peak during the previous expansion also in January 2007; and
- The median duration of unemployment increased slightly to 9.8 weeks during April, March matched the lowest rate during the current cycle which was 9.1 weeks. This was still elevated compared to the 7.5-week duration that was the lowest point of the last expansion during June of 2006.
The industry sector metrics were notably weaker in that a smaller share of the detailed industries grew during April as 57.6 percent expanded or were unchanged compared to 64.4 percent on average during the previous six months.
Changes in employment by major industry segment included the following:
• Professional and business services (+54k) – including temporary help, consistently strong;
• Health care and social services sector (+29.3k) – always robust;
• Manufacturing (+24k) – quite encouraging given long-term trends;
• Leisure and hospitality (+18k) – much weaker than the prior year;
• Construction (+17k) – a volatile sector;
• Mining (+8.0k) – especially, oil and gas extraction;
• Information (+7.0k) – better than typical;
• Financial activities (+2.0k) – a marginal month;
• Retail trade (+1.8k) – a sector under serious digital stress;
• Utilities (+1.0k);
• Transportation and warehousing (+0.4k) – rather weak ;
• Government (-4.0k) – mildly soft; and
• Wholesale trade (-9.8k) historically soft.
The broader economy is enjoying a combination of favorable dynamics including improving global growth, a new dose of fiscal stimulus (tax cuts and increased federal spending), and very gradually rising inflation. Consumer and business confidence remains high. The near-term outlook is positive. Over the longer term, trade tensions, growing government deficits and uneven income distribution loom as potentially serious policy challenges.In summary, the BLS Employment Situation Report for April was expected to be strong, the headline numbers were surprising but, upon closer inspection, close to expectations. This result is consistent with other positive employment indicators like initial and continuing jobless claims, job openings, confidence surveys, muted layoff announcements, robust hiring plans and manufacturing supply manager’s employment indexes which all tend to confirm that the labor market remains enduringly robust. The unemployment rate is quite low and declining. Average hourly earnings are still growing at a muted rate and together with labor force participation rates and duration of unemployment statistics indicate that the labor market while strong and enduring, is not overheating.
The current expansion, has endured now into its ninth year (compared to an average expansion of five or six years). This is likely the compensation for surviving the most recent historically severe, financial crisis-induced recession as well as a slow-growth recovery. The expansion still looks to continue through the end of the decade.
Expect jobs growth during 2018 to average as high of 200,000 positions per month while the unemployment rate trends down to 3.5 percent by year-end. The risk of recession remains low given the absence of any signs of critical growing imbalances or a looming financial bubble.
Word on the street
In the world of staffing and employment services, the war for talent is dominant. Therefore, unit growth is soft but wage and margin improvement, as well as more search and placement fees fuels better results. Sales growth is a bit stronger than the gains in employment. Wage rates, particularly at the margin, are growing faster than the statistical economic reports suggest. Fill ratios are lower, so staffing companies can be more selective in the positions that they choose to fill. Workers, feeling more confident, are more willing to try a new position if it offers a better perceived opportunity.
Please feel free to contact me if you have any questions or comments.