Welcome to the Working Week: A Look at the State(s) of Employment

Key Points

  • Although the unemployment rate was last week’s jobs report highlight; payrolls underperformed expectations and wage growth was weak.

  • Trends matter at least as much as levels; with payrolls and job openings having already rolled over, and unemployment claims on the watch list.

  • Be wary when you hear “the consumer is strong so there’s no risk of a recession.”

It’s been quite a few months since I penned a comprehensive report on the state of the labor market; and given the attention to the subject heading into last Friday’s jobs report, let’s get to it. It was a mixed report, with the good news being the decline in the unemployment rate from 3.7% to 3.5%, a five-decade low courtesy of strong household employment of 391k (from which the unemployment rate is calculated). Both the labor force participation rate, and the rate for prime-age workers, were consistent with last month’s at 63.2% and 82.6%, respectively.

On the other hand, nonfarm payrolls were below expectations at 136k, with private sector payrolls a lesser 114k; but the prior two months were revised higher by a collective 45k jobs. The revisions were welcome news after a four month run of negative revisions. Given recent disappointing economic news—notably the ISM manufacturing and non-manufacturing indices (including their employment components)—the “whisper number” heading into Friday’s report was lower than the consensus. Sector gainers in terms of jobs were: healthcare, business services, government and transportation. Sector flatliners/losers were: mining, construction, manufacturing, wholesale trade, information, financial activities, leisure/hospitality, and retail (the biggest loser).

There was no movement in average hourly earnings (AHE) relative to the prior month; while the year-over-year growth rate slowed from 3.2% to 2.9%. The weakness was concentrated in managers’ pay; while production/non-supervisory wages, although softer for the month, are up 3.5% year-over-year. Wages historically follow corporate earnings, with about a one-year lag; so the significant deterioration in profits growth this year suggests further downward pressure on wages. Indeed, although still high in absolute terms, job openings have rolled over.

Job Openings Have Rolled Over

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of July 31, 2019.

We can also compare the unemployment rate (a lagging indicator) to AHE to gauge potential economic inflection points. The chart below compares the two, and shows that historically once they converged and began diverging, recessions weren’t far behind; so this is something on which we will focus over the next few months.

Unemployment Rate and Wages Meet

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of September 30, 2019. *Average hourly earnings for production and nonsupervisory workers.