Payrolls were up 75,000 last month, less than half of what was expected, though the unemployment rate held steady at its 50-year low of 3.6 percent. Despite the low jobless rate, wage growth failed to accelerate, and has been stuck around 3 percent for a few months now. Downward revision shaved 75,000 jobs off of payrolls over the previous two months and our smoother, below, shows a mild deceleration in the pace job gains.
All told, it’s a weaker jobs report than we’ve become used to seeing, but what is it telling us? Is it a warning signal of weakening demand or is it more that the job market is closing in on full capacity? This sounds like a technical distinction–are the constraints on the demand or supply side?–but it’s a critical one. If we’re hitting supply constraints then the threat to the economy is overheating. Conversely, if we’re seeing the first hints of weakening demand, then the threat is a forthcoming slowdown. Note that the implications to the central bank are the opposite in these two scenarios.
It is clearly too soon to tell, and the labor market, and thus the American consumer, remain in very good shape. There is no near-term recessionary scenario in these data. In fact, the under-employment rate–U6–hit a cyclical low last month of 7.1 percent.
But headwinds have accelerated and the possibility of weakening demand is real and, to my thinking, poses a greater risk than overheating (after all, the latter would have to show up in inflation data). Both the U.S. and European central banks are thinking harder about rate cuts to offset perceived weaknesses (U.S. futures markets believe there’s 70 percent chance of a rate cut this summer). Obviously, the trade war and its potential escalation–opening the Mexican front in the war–are in the mix, as is the related weakness of U.S. business investment numbers. Germany, Europe’s alleged powerhouse economy, just posted big drops in industrial production and exports. As of this morning, second quarter U.S. GDP is tracking well south of 2 percent.
Turning to the guts of today’s report, and given the low signal/noise ratio in these monthly data, our smoother averages job gains over 3, 6, and 12 month periods. It shows a mild deceleration to 151,000 over the past three months. While that’s significantly below the near 200,000 average over the past 12 months, it’s still a strong enough number to hold down the jobless rate. In fact, we expect this number to drop as we close in on full employment.
The wage story is especially germane right now, especially given my long-held view that it takes persistent, high-pressure labor markets like this one to provide workers with the bargaining clout they otherwise lack. This improvement should show up in real wage gains, and, as I’ll show, that has clearly been the case. But while we might expect nominal wage growth to accelerate with unemployment at a 50-year low, the two figures below–hourly wage growth for all private sector workers and for middle-wage workers–show, at the end of each series, what could turn out to be a flattening in the pace of wage growth. Note the solid line–a 6-month moving average–which is either flattening or falling slightly.
Even so, the next figure shows that the gap between nominal wage growth for middle-wage workers and inflation, the difference being real wage growth. For this group–about 80 percent of the workforce–real pay is up about 1.5 percent, a solid clip and compelling evidence of the wage-side benefits of high-pressure labor markets.
Though the flattening of wage gains is worth watching, this is a bit of a Goldilocks scenario–not too hot, not too cold–as wages for middle and low-wage workers (not shown, but I’ve documented this elsewhere) are rising at a cyclically high clip, yet inflation remains tame. In fact, this is a microcosm of an important macroeconomic development in recent years: a lot less path-through from wage gains to price pressures.
Finally, there is an important weakening trend in recent jobs reports that belongs high on the watch-list: the flatlining of manufacturing jobs. Last month, factory jobs were up just 3,000 and so far this year, they’re up just 30,000 compared to 110,000 over the comparable period last year. I strongly suspect this falloff is related to Trump’s trade war as as such, it is a good example of how his actions are hurting a key constituency of American workers.