Lazy Days for Job Growth
U.S. job growth should remain steady in August. We at Action Economics expect the government's employment report for the month, scheduled for release Sept. 1, to show a rise of 130,000 in the headline non-farm payrolls figure, vs. economists' median forecast of a rise of 125,000. This estimate is similar to the 140,000 monthly average through the first seven months of 2006.
We assume the report will reveal the now usual cross-currents of restrained payroll growth but steady gains in wages and hours worked, and solid household survey data with the exception of the "pop" in the unemployment rate in July. We arrived at our forecast by examining a number of factors:
Average monthly job growth was 176,000 in the first quarter and 112,000 in the second. The lean July jobs print indicates a continued modest trajectory in the third. A handful of industries have accounted for much of the shortfall in payrolls relative to expectations in recent months.
The sharp slowdown in residential construction activity has resulted in a moderation in construction payroll growth, with monthly average growth of only 12,000 over the last seven months, compared to the 27,000 average monthly gain over the prior two years.
Retail trade has now failed to post an increase for four straight months, with a cumulative decline over the period of 85,000. The last time we saw a worse stretch was in March, 2003, when three straight months of declines on commodity price gains related to Iraq War uncertainty, perhaps similar to the current period.
The bellwether "temp" employment series has dropped in five out of the seven months of 2006. This is the worst stretch since late 2002. Since the temp series is viewed as a leading indicator for broader employment trends given the ease of hiring and firing these workers, it may be sending a message of softer job growth in the second half of 2006.
The Household Survey
While the establishment survey (i.e., payrolls) has revealed growth of only 140,000 per month in the seven months of 2006, the household measure of job growth (used to derive the unemployment rate) has revealed average monthly job growth at a robust 221,000.
Given that the household survey is less subject to large benchmark revisions, the strength in this measure provides a noteworthy contrast to the restrained gains evident in the payroll survey. The August survey will indicate whether this July pop in the unemployment rate was temporary.
Wage growth on a year-over-year basis has risen steadily since the start of 2004, and it appears that compensation costs this year have continued to move higher at a brisk pace. Both nominal earnings and real earnings are well up from the cycle trough, though strength in oil prices—and hence headline inflation used to deflate wages—has prevented any gain in real earnings.
Given the tight labor market and continued strength in various inflation measures, we expect a continued elevated trajectory for nominal earnings. If oil prices continue to show some restraint at current high levels, the real figures may start to trend upward as well.
Forecasts and Revisions
The average median forecast for payrolls for the seven months of 2006 was 190,000, compared to the average "as-reported" payroll figure of 156,000, leaving an average monthly shortfall of 34,000. Unlike most of 2005, when we saw a pattern for upward revisions to the "as-reported" figure, 2006 has revealed a pattern of net downward revisions to the figure. The current average for payroll growth over the last seven months is only 140,000, or an average of 50,000 less than the median forecast.
Median forecasts appear to be coming down to meet this lower trajectory, however. The median forecast so far in the third quarter has been 136,000 compared to the 182,000 average median forecast in the second quarter and the 213,000 average median forecast in the first.
Historically, August tends to reveal the least amount of not-seasonally-adjusted job change of any month on the year. The last two years have revealed an average gain of only 100,000. Given current cross-currents in the market, there's little reason to expect a big swing from the seasonal pattern.
Other Job-Market Indicators
Weekly initial jobless claims in August have settled in near 315,000 over the last four weeks, which is consistent with a continued tight labor market. The ongoing upswing in continuing claims, however, may indicate less downside pressure is emerging in the unemployment rate.
The current conditions series from the University of Michigan's consumer-sentiment and the Conference Board's consumer-confidence figures revealed an August drop. The Conference Board figure is the more important indicator, as it tends to be more dependent on labor market conditions. Confidence declines in August help to cap potential upside risk for payrolls on the month.
The employment components from the factory sentiment surveys have been mixed so far in August, implying a risk of no big change on the month relative to recent trends.
Recent trends in the help-wanted indexes have been consistent with a sharp slowdown in job growth. The usefulness of this survey has been suspect given the ongoing transition to use of the Internet for job postings, and the associated abandonment of newspaper advertising for jobs by many companies.
But the sharp deterioration in this series over the last four months, which has been evident in all nine regions, leaves the series at the lowest level since June, 1961. Although we're still awaiting the update on the Advertising Help-Wanted Index for July, the Online Help-Wanted Index revealed a big 102,000 drop from the June tally.
The July Challenger job-cut survey, however, fell to a six-year low of 37,200, which supports the view that the labor market remains tight. The Aug. 30 release of the ADP survey revealed private job growth of 107,000, while the Hudson employment index rose to 102.9 from 101.9. These data support our forecast.
In total, the employment reports thus far in 2006 have fairly consistently revealed a lean payroll figure but steady growth in hours worked—via the workweek, and income—via accelerating wage growth. The household survey has consistently depicted a tightening labor market as gauged by most source data, aside from the correction in these figures in the July survey. There's little evidence in available data that this mix will change in August.
Of course, the Federal Reserve will monitor the August report as it prepares for its Sept. 20 policy meeting. But unless there's an outsized gain in hourly wages, it's looking increasingly unlikely that policymakers will be swayed back to the tightening side.