By Steven R. Drexel, President and CEO of Cornerstone Staffing Solutions, Inc.
On Friday March 8, the Bureau of Labor Statistics (“BLS”) released its monthly summary of labor market activity covering February 2019. The report was alarming and puzzling at the same time as employment growth fell to a paltry 20,000 positions but the unemployment rate remained low and even improved by two tenths to 3.8%. Average hourly earnings also accelerated to an impressive 3.4 percent year-over-year increase. Dramatically slower jobs growth was alarming because it was foreshadowed by some weaker economic results and suggests an overall negative outlook. The report was puzzling because the headline weak job growth was incongruent with signs of strength in the improving unemployment rate and accelerating wage growth.
So faced with inconsistent signals, what should we conclude? Job growth, while weak during February was exceptionally strong during January so, it is likely that a moving average is more defining. The moving average suggests that the labor market, remains strong. Further, the separate, smaller and more volatile BLS Household Survey indicated that job growth was a robust 255,000 positions during February. Even further, the ADP National Employment report published last week indicated that payroll grew by 183,000 positions. ADP utilizes employment change information pulled anonymously from about 400,000 customers providing a credible alternative estimate of jobs growth. Finally, Initial Claims for Unemployment, a timely indicator of labor force dynamics, remained generally supportive during February suggesting that job growth is still healthy. On balance, while it is likely that job growth slowed somewhat during February, it is very unlikely the growth abated to the degree indicated by Friday’s Employment Situation report. So don’t panic yet!
Jobs Growth At-a-Glance
The anxiously awaited February jobs growth figure, at only 20,000 net new positions, was dramatically weaker than the 180,000 consensus expectation as well as January’s oversized and upwardly revised 311,000 increase. In retrospect, it’s not a coincidence that January was so strong and February was so weak. Weather was a factor given that December through mid-January were mild while late January through February was fierce (think Polar Vortex), particularly during the survey weeks. This was evident in the state level initial claims data and the observation that the weather sensitive Construction sector took the biggest employment hit during February. The other suspicious event was the partial Federal government shutdown which occurred during January. Intuitively, one might have thought that the shutdown would suppress employment, but it appears that some of the 300,000 idled government workers and additional private contractors found second jobs during the shutdown which inflated January and conversely deflated February. The industry sector data was interesting in that the share of the 258 detailed industries that improved during February was 57.2 percent, down from 60.7 percent during January. Given that job growth almost vanished, the observation that most of the detailed industries maintained some growth is reassuring. The average workweek dropped back a tenth to 34.4 hours possibly another weather affect if not an indicator of lower demand. In summary, January’s reported job growth certainly overstated the strength whereas February’s paltry growth understated the strength. A better gauge is the moving average of recent month’s growth which would indicate that job growth will be slower during 2019 than the veryrobust rate evident during 2018. Mildly slower growth however, still indicates that the labor market is healthy.
Unemployment Rate Update
The unemployment rate decreased by two tenths of a point to 3.8 percent. This was the norm or average of the 6 months preceding the partial government shutdown which did inflate January’s reported rate. This remains at a historically low level indicating a relatively stable, but very tight labor market. The BLS tracks six versions of the unemployment rate. The official rate is the U-3 version. The broadest or most inclusive version of the unemployment rate is U-6 which includes
all persons marginally attached to the labor force plus those employed part time for economic reasons. U-6 was notable during January because it increased by 5 tenths of a point to 8.1 percent. During February, U-6 declined by a remarkable 8 tenths of a point to 7.3 percent – a new cyclical low suggesting a material tightening of the labor market. The labor force participation rate remained constant at 63.2 percent, another component suggesting a degree of stability in tightness of the labor market during February.
Wage Rate Update
Average hourly earnings improved once again during February resulting in an annual growth rate of 3.4 percent. This is the highest rate in almost ten years and the eighth consecutive month in which wage growth has exceeded 3 percent. This was the best indicator of ongoing strength delivered by the BLS this month. More positively, inflation has receded somewhat, further accentuating wage growth since these movements enhance purchasing power which is a positive indicator for consumer spending. At this point in the recovery, with a historically low unemployment rate, wage growth would be expected to be 4 percent or higher. This expansion has featured lower productivity growth, demographic changes (an aging workforce) and regional as well as global workforce competition. All these factors tend to suppress wages.
Measures of Labor Availability
Focusing on the workers between 25 and 54 years old eliminates the influence of the baby boomers that cause the workforce to be on average older, suppressing the aggregate rates of employment and participation. Concentrating on
prime-age workers also corrects for the younger members of the labor market who may 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 labor force’s ability to continue growing despite the record long-running expansion and historically low headline unemployment rate:
- The labor force participation rate for prime-age workers decreased by one-tenth of a point to 82.5 percent; this
remains below the peak of 83.4 percent at the end of the last expansion during January of 2007;
- Seventy-nine point nine (79.9) percent of prime-age workers were employed during February; this was
unchanged during February. This level remains below the 80.3 percent peak during the previous expansion – also
in January 2007; and
- The number of prime aged workers in part time jobs for economic reasons (meaning they would prefer to work
full-time) is still 1,834,000 workers or about 28% higher than the low point of the last recovery during August of
The median duration of unemployment for all aged workers increased to 9.3 weeks during February. This was still elevated compared to the 7.3-week duration that was the lowest point of the last expansion during June of 2006.
Industry Sector Details
The industry sector metrics remained strong as 57.2 percent of the detailed industries grew during February. Changes in employment by selected industry segments included the following:
- Professional and business services (+42.0k) – including temporary help, over time the strongest;
- Health care and social services sector (+22.5k) – always robust and consistently healthy;
- Wholesale trade (+10.9k) a little better than average this month;
- Financial activities (+6.0k) – a little worse than average;
- Manufacturing (+4.0k) – during 2018, its best growth in 21 years but soft this month;
- Leisure and hospitality (+0.0k) – much weaker than average for this strong but volatile sector;
- Mining (-2.8k) – sensitive to energy prices and weather, weaker than average; Transportation and warehousing (-3.0k)
– a very weak month during February;
- Government (-5.0k) – a soft month despite the end of the shutdown;
- Retail trade (-6.1k) – worse than average this month, over time, challenged by online options; and
- Construction (-31k) – another volatile, weather sensitive sector, way below average this month.
Employment Situation Retrospective
In summary, the BLS Employment Situation Report for February was of great interest due to a high level of ongoing economic anxiety and to see if last month’s pace could be sustained. The February results were deflating and contradictory. After analysis the result indicates that the labor market remains enduringly strong for the time being. The unemployment rate is quite low and reassuringly, relatively stable over the past year. Average hourly earnings are increasingly showing some real (greater than inflation) growth. Average weekly hours drifted down mildly. These factors along with labor force/employment participation rates and duration of unemployment statistics indicate that the labor market while solid and persevering, is not overheating and has room to continue growing. All eyes will be on next month’s report hoping to confirm this somewhat nuisanced analysis.
The Outlook for 2019
The broader economy is not as robust as it was during most of last year. The stock market has been volatile while recently recovering from a correction (corrections precede recessions … but only about half the time), growth particularly in China and Europe is slowing, consumer and business confidence has softened, and trade and political tensions remain high. However, the American consumer is in good shape, a continuing dose of fiscal stimulus (lower tax rates and increased federal spending) supports sustained growth during 2019, and the banking system is healthy and is lending at an increasing and supportive pace. U.S. growth will be slower than 2018, and risks are squarely on the downside. But on balance, indications suggest that the expansion should continue through 2019. Over the longer term, labor shortages, trade and political tensions, growing government deficits and uneven income distribution loom as potentially serious
The current business cycle expansion has persisted into its tenth year (compared to an average expansion of five or six years). This is our reward for enduring the historically severe, financial crisis-induced 2008 recession as well as the subsequent, slow-growth recovery.
Expect jobs growth during 2019 to average around 180,000 positions per month while the unemployment rate trends down to around 3.5 percent by year-end. The near-term risk of recession is creeping up but remains low given the absence of any critically growing asset bubbles or an imminent financial shock.
Word on the street
In the world of recruitment, staffing and employment services, the forecast calls for slow growth very consistent with recent years; the availability of workers, or the skills shortage, limits growth. Recruitment of passive or employed workers, but willing to consider a move, is the key to success in this environment. Workers, feeling more confident, are willing to consider a new opportunity if the new position offers an increase in pay or perceived growth or even just a better commute. The BLS estimates year-over-year staffing employment growth at 2.2 percent, while the American Staffing Association reports a small decline in employment growth. Employment growth is slow, but wage improvement, as well as more search and placement fees all combine to provide better financial results despite unexciting unit growth. Wage rates, particularly for in-demand skilled positions, are growing faster than the published aggregated economic reports suggest. Fill ratios are declining, and time-to-fill metrics are stretched, so staffing companies can pick and choose the positions that they work on.
Please feel free to contact me if you have any questions or comments.
More About Cornerstone Staffing
Cornerstone Staffing Solutions is among the largest staffing firms in America and received ClearlyRated’s (formerly Inavero) Best of Staffing® Client Award every consecutive year since 2016. 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, and Chicago, Illinois-based Arlington Resources, Inc. and Casey Accounting & Finance Resources. 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.