August 02, 2024
The July jobs report came in considerably weaker than expected. The 114,000 job growth reported in the establishment survey was the weakest since 108,000 in April (originally reported as 175,000), and prior to that, a 243,000 job loss reported for December 2020. This brings the average gain for the last three months to 170,000.
The jump in the unemployment rate to 4.3 percent continues the upward trend since the 3.4 percent low hit in April of last year. Most of the increase has been in 2024, as we started the year with a 3.7 percent unemployment rate.
Rising Unemployment Hits Disadvantaged Groups Hardest
Just as the low unemployment of this recovery benefitted relatively disadvantaged groups the most, the rise in unemployment over the last year has hit them hardest. The unemployment rate for workers without high school degrees stands at 6.7 percent, 2.4 percentage points above its 4.3 percent low hit in November 2022. For workers with just a high school degree, the unemployment rate in July was 4.6 percent, 1.3 percentage points above its low hit in July of last year. By contrast, the 2.3 percent unemployment rate for college grads is just 0.5 percentage points higher than the 1.8 percent low hit in September 2022.
The 6.3 percent rate for Black workers is 1.5 percentage points above the 4.8 percent low hit in April of last year. The 5.3 percent unemployment rate for Hispanic workers is 1.4 percentage points above the 3.9 percent low reached in September 2022. The 5.6 percent rate for women heads of families is 1.6 percentage points above the low of 4.0 percent in April 2022, but down 0.6 percentage points from the 6.2 percent June rate.
Employment Rates for Prime-Age Workers Stay High
A piece of good news in this report is that the labor market for prime-age workers (ages 25 to 54) still looks strong. The employment to population ratio (EPOP) for prime-age workers overall rose 0.1 percentage points to 80.9 percent, tying the high for the recovery, and 0.3 percentage points above the prerecession peak. The EPOP for prime-age men of 86.6 percent ties the recovery peak, while the 75.3 percent rate for women is 0.4 percentage points below its all-time high hit in May.
Temporary Layoffs Account for Most of the Rise in Unemployment
One somewhat encouraging sign is that over 70 percent of the rise in unemployment is due to workers who report being on a temporary layoff. (There was a rise of 346,000 in the number of people who reported working part-time for economic reasons, but much of this was a reversal of 199,000 drop in June.) There was also a substantial increase in the share of unemployment due to people who quit their jobs, rising from 11.2 percent in June to 11.9 percent in July. This is still a relatively small share for an economy with a 4.3 percent unemployment rate, but it was just 10.8 percent in May. These monthly figures are erratic, but these compositional changes among the unemployed are at least somewhat encouraging.
Health Care Again Leads Job Growth, Government Growth Slows Sharply
The health care sector accounted for almost half of July’s job growth, adding 55,000 jobs, slightly under its 61,000 average for the last year. The government sector added 17,000 jobs, down from an average of 46,000 over the last 12 months. Restaurants added 19,500 jobs, slightly faster than their monthly average of 13,000 over the last year. The information sector, which had seen pretty much stagnant growth over the last year, lost 20,000 jobs in July.
Construction and Manufacturing Still Adding Jobs
Despite the impact of high interest rates, construction is still adding jobs at a healthy pace, with an increase of 25,000 in July. Even residential construction added 9,100 jobs. Manufacturing employment, which has been nearly flat over the last year, increased by 1,000 jobs in July, although a shorter workweek led to a 0.4 percent drop in the index of aggregate hours in manufacturing. Continuing job growth in these sectors is a good sign since they have historically been the most cyclical components of the economy.
Index of Aggregate Hours Falls 0.3 Percent
One disturbing sign in the establishment survey was a decline in the length of the average workweek, leading to a 0.3 percent drop in the index of aggregate weekly hours. All of this decline was on the goods side, with the index of hours for construction dropping 1.2 percent and manufacturing falling 0.4 percent, as noted earlier. The index for services rose 0.1 percent. These data are erratic. The drop in construction still did not reverse a big rise reported for June, but the decline should still be seen as a warning.
On the plus side, the drop in hours is a promising sign about the path of productivity. If we get another decent quarter of GDP growth, as the initial data suggest, we will see strong productivity growth. That will help to allay concerns about inflation. As a result of strong productivity growth through the second quarter, unit labor costs rose just 0.5 percent over the last year.
Wage Growth Remains Moderate
The annualized rate of wage growth over the last three months was 3.7 percent, slightly higher than the 3.6 percent growth over the last year. This is only modestly higher than the pace of wage growth in 2018–2019 when inflation was in-line with the Fed’s 2.0 percent target. Also, if workers are to regain the share of income lost to profits in the pandemic, a slightly faster pace of wage growth would still be consistent with the 2.0 percent target.
The July Job Report Provides Serious Grounds for Concern
A 4.3 percent unemployment rate is still low by historical standards, but it is up by almost a full percentage point from its low last April, and more concerning, it is up 0.6 percentage points from its January level. The recent trend is definitely not good news. Although it is a plus that much of the rise in unemployment is due to workers who say they are on temporary layoffs.
However, the 170,000 average pace of job growth for the last three months should be adequate to keep the unemployment rate from rising. It is faster than most estimates of the underlying rate of potential labor force growth, although immigration is a big unpredictable factor here.
In any case, even if the unemployment rate stabilizes, we are looking at a substantially weaker labor market than what we had last year, which means over a million additional workers are unable to find jobs and millions more are less secure in their employment. In terms of measuring risks, it seems there is now a far greater risk of weakness than inflationary pressures.
