A More Moderate Second Half The Chill Is Creeping Into The Labor Markets

Until the August job numbers, there was one glaring inconsistency in the slowdown forecast expected by most economists. While other economic barometers were signaling a cooler pace of growth in the second half, readings from the labor market remained steamy.

Not anymore. U.S. industries added 179,000 workers to their payrolls in August--a good gain but far less than generally expected and well below the nearly 300,000-per-month pace of the previous three months (chart). Employees worked shorter hours; the unemployment rate refused to dip. And wages still show no signs they are growing any faster now than they were a year ago.

What does it all mean? The evidence now seems clearer than ever that the economy is on a slower growth track than its 4% pace of the past year. As a result, many manufacturers will find it difficult to pass along higher raw-materials costs, many service industries will have to limit their hiring, and in general, any heavy inflation pressures are less likely to build.

The slowdown is primarily the result of the Federal Reserve's interest rate hikes since February. Because of the lag time, the impact of the Fed's seven-month tightening of policy is only now beginning to be felt. Of course, one month's job numbers do not make a trend, but chances are rising that the Fed will not have to tighten policy any more for the rest of the year.

The August job numbers were far from weak, but last month's increase was the smallest since January. Overall, the report was consistent with other recent data, which have suggested that third-quarter growth in real gross domestic product could be 2% or less.

The key factor to remember is the tepid growth in hours worked, which correlates strongly with real GDP growth. The workweek dipped from 34.7 hours in July to 34.5 hours. That decline, combined with the modest rise in payrolls, left overall worktime thus far into the third quarter up at an annual rate of only 1.6% compared with the second quarter. That's far below the second quarter's 6.6% advance and half the 3.2% pace in the first quarter.

Service businesses, which have accounted for 85% of this year's job growth, added a solid 154,000 new jobs in August, but that gain was well below the 266,000 average for the prior three months.

Among goods producers, construction employment dipped by 6,000, the first decline in more than a year. That clearly reflects the slowdown in housing this year and the fourth-quarter peak in construction activity generally. More job losses in the construction trade appear likely this fall.

The only solid job gainer in August, compared with recent trends, was manufacturing. Factories put on 32,000 workers, bringing this year's total gains to 135,000. Also, the factory workweek rose six minutes, to 42 hours, and overtime jumped 12 minutes, to 4.8 hours, an all-time high. All this means that industrial production in August posted a healthy advance.

However, factory activity is far from robust, as indicated by the August purchasing managers' index, which dipped to 56.2% from 57.8% in July. The index suggests that growth in manufacturing, while stout, was nonetheless the slowest in the past eight months.

At the same time, however, the purchasers said the prices they pay for materials increased at the fastest rate in six years (chart). But don't be too quick to read an inflationary implication into that. Several purchasers were concerned about the rise, because they were unable to raise product prices to cover the added cost.

Inflation is even less of a worry because the labor markets are not tight enough to generate much of a bidding war for workers. Indeed, the hiring surge this summer began to bring more people into the job markets who had been discouraged at the prospects of finding a job. The labor force jumped by 732,000 in August. That hardly suggests that labor markets are too tight.

Because of that surge, the jobless rate remained at 6.1% in August. The labor force has room to grow a bit faster. During the past year, it has expanded by just 0.7%--far less than the 1.7% increase in the working-age population.

As more people rejoin the workforce in coming months, the jobless rate should continue to hover around 6%. That's above the point where a shrinking pool of available labor pushes up wages and inflation. Of course, labor shortages are already appearing in specific regions and professions. But in general, slack remains in the job market. And that's why wages are still unable to generate much of an upward trend.

Hourly wages in the nonfarm sector rose 0.2% last month, to an average of $11.13. However, because of the shorter workweek, weekly pay fell 0.4%, to $384. Over the past year, hourly pay has risen 2.5%--slower than its pace earlier in 1994. Growth in service wages has modulated around 2.5% for the past two years--about half its annual rate before the last recession.

On the surface, factory pay seems to be picking up (chart). It grew by 2.8% in the 12 months ended in August, faster than the 2.2% increase of a year ago. But this reflects the pickup in overtime. Excluding overtime, factory pay has risen just 2.1% this past year--unchanged from August, 1993, and below the growth in service wages.

The meager gain in straight pay indicates that manufacturers are having little difficulty attracting new workers. Moreover, even with overtime pay, factory wages are rising below the exceptionally strong trend in manufacturing productivity. That means unit labor costs--the major determinant of price pressures--are still falling in the factory sector.

The slip in weekly pay reported in August does suggest that even with more jobs, personal income made little headway last month. As a result, consumers probably continued the spending slowdown they began in the spring.

True, sales of motor vehicles bounced back in August. U.S.- made cars and light trucks sold at an annual rate of 12.6 million (chart). But sales had fallen in the previous four months. And consumers may have rushed to buy 1994 models before the 1995 models sporting heftier sticker prices appeared in showrooms. Sales for the quarter still should end up below the second-quarter level.

For now, auto makers are optimistic. A downshift in vehicle demand, however, would certainly cool this expansion's growth prospects. And as the tepid August labor data show, the U.S. economy's mercury has already fallen a few notches.