By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
Last week’s employment report pointed to a sharp deceleration in national payroll growth in August. Consensus estimates were expecting a report to show a gain of 750,000, but only 235,000 jobs were added. In July, over 1 million payrolls were added. The August result was a significant disappointment.
The leisure and hospitality sector was the highest driver of job growth during the past twelve months. As a comparison, leisure and hospitality jobs increased by 2.25 million over the past 12 months, about double the second leading sector of professional and business services with 1.1 million jobs. Over the past six months, average monthly growth was 350,000 jobs. The subdued overall payroll growth from the August report was partly due to the leisure and hospitality sector. It remained unchanged. Under leisure and hospitality, food and drinking places lost 42,000 and arts, entertainment and recreation gained 36,000.
There were some bright spots in the report. Professional and business services, a barometer for subsequent payroll growth, added 74,000 jobs. Architectural and engineering services and computer systems design and related services both saw strong growth. An economy with any underlying growth weakness would not observe such patterns.
Transportation and warehousing added 53,000 jobs and is now above the level of jobs that existed prior to the pandemic layoffs. Transportation and warehousing is also the leading job creator in Southern Indiana since early last year.
Manufacturing gained 37,000 jobs but remains 378,000 below its pre-pandemic level. We should expect to see continued growth in manufacturing in the near term, despite current challenges in the supply chain. Inventory levels are at historical lows, and production will be required to restore inventories, and to meet order back logs. The ISM Index increased last month, pointing to additional growth in manufacturing.
Despite the overall weak payroll number in the establishment survey, there were some bright spots in the household survey version of the report. The unemployment rate declined to 5.2%, down from 5.4% in July. This decline came about with the labor force increasing by a weak 190,000, but employment was up by 509,000. The number of unemployed dropped by 318,000. All combined to reduce the unemployment rate by 2/10ths of a point. The significance here was the strong gain of 509,000 in employment growth.
Another takeaway from the report was the rise in average hourly earnings. Average hourly earnings increased by 17 cents, rising from $30.56 to $30.73 an hour. Starting in February of 2020, the increase in average hourly earnings of private employees is the steepest since 2006 (the start of my available dataset used here). For production and non-supervisory employees, the gain since early 2020 is the largest since the 1960s. In my view, these wage increases will be paid for through gains in productivity. Investments in digital technologies and automation will pave the way for additional productivity gains. The pandemic has accelerated trends that were already underway, and the seismic shift in wages will be complimented by similar gains in productivity.
Another important development from last week was the report on unemployment claims. The Department of Labor reported that new claims for unemployment declined to 340,000, the lowest level since the start of the pandemic. Under normal times, such a level of unemployment claims is usually associated with the start of a recession. Times are not normal, and this further decline in unemployment claims points to further evidence of a labor market recovery.
There is no doubt that the Delta variant is now having an impact on payroll growth, particularly in some services like leisure and hospitality. The chance of widespread shutdowns of last year is slim. While the variant might dent growth in some sectors, we are not going to observe a significant slowdown in the economy. However, you will likely see a downward revision in some of the GDP estimates for the last quarter. One key for growth the rest of the year depends on what happens with the labor force. Last month’s employment report did see an increase, but we really need labor force growth that exceeds 190,000 a month. If the Delta variant holds back this growth in labor force, an adjustment to slower growth will be justified.
Data sources: FactSet, Bureau of Labor Statistics Employment Situation—August 2021