Turn Down For What: Why is Job Growth Slowing?

Weaker job growth raises concerns, but there are reasons not to worry; and reasons to believe wage growth is stronger than traditional measures show.

Key Points

  • Last Friday’s weak jobs report raised alarm bells about slowing job growth, but perhaps it’s natural at this stage in the cycle.
  • Wage growth has been held down by both secular and “math” problems.
  • Small business survey data, as well as alternate wage growth measures, suggest wage pressures are on the rise.

After the financial television networks’ typically-breathless countdown to last Friday’s jobs report, the release was a downer, at least as initially diagnosed. Today’s report will attempt to tell a more detailed tale of what’s going on with jobs, wages, and their potential impact on Fed policy.

May’s non-farm payrolls report showed a weaker-than-expected gain of only 138k; below both the consensus expectation and the recent trend. And although the unemployment rate ticked down to 4.3%, the details of that component of the release were weaker than expected; as the household survey employment series fell by 233k and the labor force participation rate (LFPR) fell 0.2 points.

On the subject of the LFPR, it’s important to highlight that it’s getting harder for companies to attract individuals who are not currently working. The pool of “discouraged” (but still available) workers has been falling precipitously during this expansion. About two-thirds of those not working represent older retirees; while the “other” category—stay-at-home parents, folks on disability, students, etc.—now represents about one-third.

Why job growth has waned

First, there was likely yet again a seasonal adjustment problem. As highlighted by High Frequency Economics (HFE), the May 2016 report was even weaker—payrolls were up only 38k—with similarly weak details. Thereafter, payrolls rebounded sharply. The average rise in payrolls so far this year—at 162k—is below the 187k from last year; but that includes the below-trend May reading. A rebound in the June and July data is expected.

Second, and more importantly, job growth is naturally waning given that we’re already likely at “full employment” and given the fact that we’re entering the ninth year of an economic expansion (see first chart below, showing a six-month average to smooth out month-to-month volatility). HFE notes that even 162k job gains per month—1.3% at an annual rate—is more than enough to keep both the headline (U3) and broader (U6) unemployment rates trending down (see second chart below).

Source: Department of Labor, FactSet, as of May 31, 2017.