By Steven R. Drexel, President and CEO of the Cornerstone Staffing Solutions, Inc. family of companies
On Friday July 6, the Bureau of Labor Statistics (“BLS”) released its monthly summary of labor market activity covering June 2018. This was a much anticipated report given all the moving parts in the broader economic landscape. On balance, it was a very reassuring report, particularly for those who worried that the availability of labor was tapped out or that sparks of wage inflation foreshadowed a too rapid accent.
The headline jobs growth number at 213,000 net new positions was decidedly better than the 195,000 expectation. This is punctuated by the fact that revisions to April and May totaled an additional 37,000 net new jobs. The unemployment rate increased by two tenths of a point to 4.0 percent which paradoxically, is viewed as quite good news given that job growth was strong but labor force growth was even stronger as a net 601,000 new job seekers became available in June. For comparison, the average increase in the labor force during the prior six months was 168,000 job seekers. The change in average hourly earnings was muted as the year-over-year comparison held steady at 2.7 percent during June.
The employment growth figure at 213,000 net new jobs along with revisions to the preceding two months brings the year-to-date average to 214,500. This represents an acceleration from 2017’s 182,000 pace which is remarkable given the extended length of the current economic expansion (108 months) as well as a record 93 uninterrupted months of employment growth. Most economists forecasting 2018 job growth would have been pleased to see a repeat of the 2017 pace, so the acceleration is a welcome surprise. One cautious line of thinking suggests that at this stage of the expansion, after seeing a gradually slowing rate of growth during 2016 and 2017 and with a diminutive unemployment rate at around 4 percent, it looks like the labor market is nearly exhausted. The other optimistic line of thinking suggests that the expansion is aging but it has been a slow growth expansion so the length is not as big a concern. Furthermore, with labor force participation and wage rates both relatively low coupled with still extended durations of unemployment – these metrics suggest that the labor markets have some reserves available to support further employment growth. The June report supports the optimistic line of thinking.
The unemployment rate increased by two tenths of a point to 4.0 percent during June. The broader measures of unemployment that include discouraged workers and those marginally attached and part-time for economic reasons also increased by two or three tenths. These are still really low rates by any historical perspective. The increase during June is paradoxically reassuring because it was caused by a large increase in the labor force, but also because after six months of stability ending in March – April and May recorded notable declines. Had that pattern continued, one would expect that the labor force would be quickly exhausted and a serious threat to the broader economy. The two tenths increase during June breaks a potentially troubling pattern.
Average hourly earnings during June indicated that wages grew by 2.7 percent on a year-over-year basis. During previous economic expansions, when the unemployment rate was below 4.0 percent, growth in wage rates exceeded 4.0 percent. It is unfortunate that workers have not seen stronger wage gains during this long expansion and painful to observe that this month the rate of general price inflation wiped out any real income gains for the average worker. 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 of months and unemployment across many dimensions is at or near a 17-year low. Explanations for the absence of wage growth include the notion 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 the large generation 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 suppressing wage growth is the effect of global competition which postulates that work shifts to lower wage locations when domestic wages tip the balance sufficiently.
Isolating the prime-age workers (between 25 and 54 years old) eliminates the influence of the aging baby boomers that cause the workforce to be on average older, likely suppressing the aggregate 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 unemployment:
- The labor force participation rate for prime-age workers increased by two-tenths 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 three (79.3) percent of prime-age workers were employed during June, up slightly from May 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 8.9 weeks during June. 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 remained strong as 65.5 percent of the detailed industries grew during June compared to May.
Changes in employment by major industry segment included the following:
• Professional and business services (+50k) – including temporary help, consistently strong;
• Manufacturing (+36k) – encouraging given long-term trends;
• Health care and social services sector (+34.7k) – always robust;
• Leisure and hospitality (+25k) – better than average, often seasonal;
• Transportation and warehousing (+15.4k) – a little better than typical;
• Construction (+13k) – a volatile sector, below average this month;
• Government (+11k) – the increase is based entirely on local rather than national government;
• Financial activities (+8.0k) – a modestly soft month;
• Mining (+4.9k) –close to the 12 month average growth;
• Wholesale trade (+2.9k) rather soft;
• Information (+0.0k) – better than typical; and
• Retail trade (-21.3k) – a sector under serious digital stress.
In summary, the BLS Employment Situation Report for June was expected to be solid, the actual results were strong and reassuring. This result is consistent with other public and private employment statistics including initial and continuing jobless claims, job openings, consumer and business confidence, announcements layoffs, hiring plans and supply manager’s employment indexes which all tend to confirm that the labor market remains enduringly, if not surprisingly, robust. The unemployment rate is quite low but relatively stable. Average hourly earnings are still growing at a muted rate and together with labor force/employment participation rates and duration of unemployment statistics indicate that the labor market while strong and enduring, is not overheating. Those looking for weakness will not find it in the labor markets.
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 slowly but surely 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.
The current expansion, has endured now into its tenth year (compared to an average expansion of five or six years). This is likely the pay-back for suffering 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 in excess of 200,000 positions per month while the unemployment rate trends down to around 3.5 percent by year-end. The near-term risk of recession remains low given the absence of any critically growing imbalances or a looming financial shock.
Word on the street
In the world of staffing and employment services, there are no signs of weakness in demand, rather the tightness in the labor market remains the critical constraint. The BLS puts year-over-year employment growth at 3.2 percent, while the American Staffing Association reports 1.1 percent employment growth; these measures create a range that feels about right. Therefore, headcount growth is soft but wage and margin improvement, as well as more search and placement fees supports better results. 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.
More about Cornerstone Staffing Solutions
Cornerstone Staffing Solutions is among the largest staffing firms in America and received Inavero’s Best of Staffing® Client Award in 2016, 2017 and 2018. Since 2003, Cornerstone has grown from a neighborhood staffing provider to a national firm that employs thousands of people at hundreds of companies from coast to coast. The Cornerstone family of companies also includes Dallas, Texas-based RightStone (www.rightstone.com), and Chicago, Illinois-based Arlington Resources, Inc. (www.arlingtonresources.com) and Casey Accounting & Finance Resources (www.caseyresources.com). Providing candidate searching and job placement for administrative, industrial, technical, sales and transportation positions, Cornerstone truly is where talent and jobs meet. Visit Cornerstone at: http://www.cornerstone-staffing.com.