Abacus: Lower Job Growth Could Mean Tight Labor Market

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There’s been a lot to look forward to this month to get people motivated, and the month’s only halfway over. Some movie lovers might be driven to see Dwayne Johnson in his newest film, Rampage. However, basketball fans are probably looking forward to the start of the NBA Playoffs more. Yet, economists and related analysts may be the most motivated group after the release of the recent Employment Situation by the Bureau of Labor Statistics earlier this month.

The unemployment rate continues to show the strength and resilience of the economy, maintaining its low rate of 4.1 percent for the sixth month in a row – the longest term of low unemployment in recent decades. The last time the economy sustained a constant low unemployment rate was in 2000 with a rate of 3.9 percent from September to December. Moreover, the economy hasn’t experienced consistently low unemployment rates like this since 2000, when the rate ranged from 3.8 to 4.1 percent that entire year.

 Source: U.S. Bureau of Labor Statistics

Source: U.S. Bureau of Labor Statistics

In a move toward equality, the unemployment rate for both men and women aged 20 and over were 3.9 percent. This is the first time since July 2017 that the rates for both genders in this age demographic has matched up. Additionally, the unemployment rate for persons 25 years and older with at least a bachelor’s degree went down from 2.3 percent in February to 2.2 percent last month. This follows the low 2.1 percent it maintained from November last year to January until it’s recent 0.2 percent hike in February. This is significant because unemployment rate for this demographic has been stabilizing near 2 percent since October last year, almost parallel to the national unemployment rate. This is the lowest it’s been for this demographic since the before the recession, when it also fluctuated near 2.1 percent

In a remarkable turn of events, total nonfarm employment grew by only 103,000 in March. Given that the prior month’s adjusted job growth of 326,000 was the largest since July 2016, last month’s job growth had an adversely steep drop. This is the lowest job growth turnout since October of last year, when the unemployment rate began to sustain a consistent rate of 4.1 percent.

Furthermore, Monthly job growth usually outpaces estimates by data analysts, forecasting firms and other economists. For the first time in recent months, job growth was lower than what was expected by economists who believed around 178,000 jobs added. March’s job growth was even further away from Moody’s Analytics and Automatic Data Processing (ADP) estimates, which both determined would be 241,000. It’s possible that what the Federal Reserve and economists have hoped for since the year began may finally be happening – there’s now a tighter labor market. With this at hand, it’s expected that wage growth may rise more steadily than it has in the past few months.

The manufacturing industry continues to show an upward trend in job growth with this month’s 22,000 job growth in durable goods manufacturing. Outside of being the main contribution to last month’s growth, manufacturing in durable goods has been responsible for close to 75 percent of the industry’s job growth over the past year. Although the growth was 10,000 jobs less than February’s job growth, last month’s gains are still relatively positive compared to job growth in months’ prior.

The health and education industry experienced another low turnout in job growth with 25,000 jobs added to healthcare. Almost two-thirds of the growth was mainly from gains in ambulatory services jobs, which helped offset the job losses in education. However, the decrease in healthcare job growth by 3,000 jobs is nowhere near as steep as the shocking drop the industry faced in February when job growth decreased by 22,000 and ended the health and education industry’s upward job growth trend.

The mining and logging industry experienced a job growth of just 8,000, which was much lower than other production-oriented industries. However, employment in mining and logging has grown almost 10.1 percent larger than it was a year ago. This annual percentage growth is significantly higher than any other industry’s annual percent change in employment in the last year.

In other exciting news, the Professional and Business Services industry experienced strong job growth in Accounting and bookkeeping services. After suffering consistent job losses since September of last year, these services experienced a jump of 9,600 jobs – a much higher turnout than February’s 500 job growth. It’s probable that with the deadline for filing taxes fast approaching on April 17th, many consumers might have been more interested in getting professional tax advice. With the recent tax reform, this filing period will be the last time some deductions can be used. This growth is a generous contributor to the Professional and Business services industry’s growth last month, as it is responsible for almost one-third of the overall growth that helped maintain the industry’s continued upward trend in job growth.

In the case for wages for production and nonsupervisory employees, who make up a majority of the labor market, average hourly earnings increased by only four cents to $22.42 last month while average weekly earnings decreased by 89 cents to $755.55 during the same period. Each pay type shows signs that are surprisingly different from their expected upward trend given the 4.1 percent unemployment rate the economy has recently held. With typical economic theory, you would expect an economy that has sustained such a low unemployment rate for several consecutive months to have a tight labor force. Consecutively, employers would feel pressure to increase wages to incentivize current employees and prospective new hires to be employed at their company.

Yet, the annual growth in average hourly earnings has stabilized in the last four months near 2.42 percent, which is low considering the 3 to 4 percent annual growth it had during the recession. Furthermore, annual growth in average weekly earnings have decreased overall after it’s high of 4.3 percent in October 2010 despite spiking up quickly during that year after the recession ended. The annual growth for this pay type has been fluctuating up and down between 2.4 and 3 percent since October. Many economists claim the economy didn’t have a tight labor market as over 200,000 jobs have been added each month since October, meaning the labor market still had room for growth not just for new entrants but also discouraged workers and other persons marginally attached to the labor market. This could explain why wages haven’t grown strongly as of late notwithstanding the low unemployment rate.

Now that job growth has slowed down, employees may finally start to see the significant wage growth that they’ve been hoping for since the unemployment rate reached its newest low. As the Federal Reserve plans to increase interest rates more regularly in the coming years, these signs of a tight labor market could also exacerbate the need for wages to rise intensely. Whether you’re an hourly or salary earner, you’ll have to stay up to date with economic news to see whether more marginally attached people join the labor force or if the market continues to signal that it's getting tighter.