By Steven R. Drexel, President and CEO of the Cornerstone Staffing Solutions, Inc. family of companies
On Friday March 9th, the Bureau of Labor Statistics (“BLS”) released its monthly summary of labor market activity covering February 2018. In brief, the report indicated a “best of both worlds” situation. Employment growth is accelerating while wage inflation remains mild. The consensus expectation called for strong growth of around 220,000 new positions (notably stronger than the 182,000 average increase during 2017). The actual BLS report indicated that February’s job growth exceeded all expectations, posting a booming 313,000 net new jobs. February’s growth brought the three-month average rate up to 242,000 positions, a rate that indicates that the economy is accelerating, and that full employment is still a distance off, despite a very low unemployment rate and 89 consecutive months of employment growth — the longest run of this kind.
February 2018 was an astounding month with nary a discouraging metric. The unemployment rate remained constant for the fifth consecutive month at 4.1 percent signifying that the tight labor market is stable despite persistently stronger employment growth. Moreover, the broadest measure of unemployment that includes those marginally attached and working part time for economic reasons was also unchanged at 8.2 percent. The labor force participation rate improved by a meaningful three tenths to 63 percent after having remained constant for the four preceding months. With employment growing and the unemployment rate flat, it only stands to reason that the labor force is growing and in fact, during the first two months of 2018, the labor force grew by an impressive 1.3 million persons. This is the fastest rate in 18 years. With the labor force growing this fast, one has to believe that there is still capacity for continuing employment growth. Perhaps the number that had the most analysts on the edge of their seats this month was the change in average hourly earnings. During February, average hourly earnings grew at an annual rate of 2.6 percent. This moderation, from January’s originally reported 2.9 percent, is reassuring to the financial markets who fear that a rapidly accelerating wage growth will cause the Federal Reserve Bank to tap the inflation brakes, which would slow down the economy. As a consolation to employees who want fatter paychecks, the average workweek increased by a tenth to 34.5 hours which provides a boost to average weekly earnings.
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.
- Seventy-nine point three percent of prime-age workers were employed during February, up slightly from January yet still below the 80.3 percent peak during the previous expansion in January 2007;
- The labor force participation rate for prime-age workers also improved by four-tenths of a point to 82.2 percent; This too is still below the high of 83.3 percent at the end of the last expansion during November of 2006.; and
- The median duration of unemployment was down slightly to 9.3 weeks during February. This is 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 markedly stronger in that a broader share of the detailed industries grew during February as 68.6 percent expanded or were unchanged compared to 58.9 percent during January. February’s index was strong, the average rate during 2017 was 62.7 percent. Further, February’s result was at the highest level seen during the past 40 months.
Changes in employment by major industry segment included the following:
- Construction (+61k) – remarkably strong, February was an unusually mild month in terms of weather;
- Retail trade (+50.3k) – it’s unusual to see this sector with any significant growth;
- Professional and business services (+50k) – including temporary help, typically strong;
- Manufacturing (+31k) – quite encouraging given long-term trends;
- Health care and social services sector (+29.1k) – always robust;
- Financial activities (+28k) – a much better than average month;
- Government (+26k) – nearly all local rather than federal government;
- Leisure and hospitality (+16k) – consistently strong;
- Transportation and warehousing (+15.4k) – particularly strong in the trucking sub-sector ;
- Mining (+8k) – especially, oil and gas extraction;
- Wholesale trade (+5.8k);
- Utilities (+1.2k); and
- Information (-12k) – the only major segment to decline, motion pictures were soft.
In summary, the BLS Employment Situation Report for February was expected to be strong but turned out to be exceptional. This result is consistent with other up-beat 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, of late, stable. However, during 2018, the labor force has been growing with enough gusto to fuel accelerating employment growth without further depressing the unemployment rate.
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 only mild inflation. Consumer and business confidence remains high. The near-term outlook is positive. Over the longer term, growing government deficits and uneven income distribution loom as potentially serious policy challenges.
The current expansion, has endured now into its ninth year (compared to an average expansion of five or six years). This is likely the pay-back for surviving the most recent historically severe, financial crisis-induced recession as well as a slow-growth recovery. The expansion looks to continue through the end of the decade.
Expect jobs growth during 2018 to average north 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 evident. Therefore, unit growth is soft but wage and margin improvement, as well as more search and placement fees provides for better results. Sales growth is stronger than the gains in employment. Wage rates, particularly at the margin, are growing faster than the statistical economic reports suggest. Job openings remain high but 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.