The Real State of the US Labor Market

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The Real State of the US Labor Market

Friday’s US Employment Situation Report was a bit of a mixed bag. The number of jobs grew by 130,000, light versus expectations of 150,000 even though boosted by 25,000 temporary Census jobs. On the plus side, average hourly earnings increased by 3.2% year-on-year and unemployment was unchanged at 3.7%.

By our reckoning, however, this was a good report and shows a still strong US labor market. Here are 4 data points that support this view:

#1) African American unemployment.

  • Academic work shows that African Americans have historically been the first demographic cohort to feel an upcoming US labor market slowdown. There is a paper on the topic at the end of this section.
  • African American unemployment reached a new low (back to 1972, when data was first collected) in August 2019 at 5.5%. This is a full percentage point lower than the average from January – July 2019.
  • Participation rates in August (62.2%) were essentially unchanged from the Jan – July 2019 average (62.4%)

Takeaway: a new all time low for African American unemployment is an important sign that the overall US labor market remains very healthy.

#2) U-6 unemployment, the most comprehensive measure of joblessness in the BLS report – something akin to a “real feel” temperature in a weather forecast.

  • August’s U-6 unemployment rate was 7.2%, lower than the January – July average of 7.3%.
  • Just as important: U-6 unemployment is now well below the last cycle’s trough of 8.0% (March 2007) and closing in on the record low of 6.9% (April 2000).

Takeaway: we think U-6 is a better measure of total US labor market health than the headline U-3 number and the August report was solid.

#3) Workers with only a high school diploma.

  • 22% of the current US labor force finished their formal education with a high school degree.
  • Last month the unemployment rate for this cohort was 3.6%, slightly lower than the Jan – July average of 3.7%. Participation rates have been stable at 56 – 57%.

Takeaway: this is an important group to watch because any further improvement in US labor market conditions will need to come (at least in part) from this cohort. Unemployment rates for 4-year college grads (2.1%) and workers with some college/associates degree (3.1%) are at frictional levels, both with much higher participation rates (74%/66% respectively).

#4) Labor force participation rates by gender.

  • Male participation rates for workers +20 years old has flat-lined over the last 5 years at 71-72%. Last month they were 71.7%.
  • Female participation rates have actually been increasing over the last 4 years, from just below 58% in 2015 to 59.0% last month.
  • Every percentage point of increase in either male or female labor force participation represents 1.2 million new potential workers.

Takeaway: increasing labor force participation is one way to solve the US economy’s mismatch of employers looking to hire and available workers. Fed Chair Powell has spoken on this issue frequently and mentioned it as a reason to keep the US economy running “hot” as long as inflation is not a concern.

Final thought: as much as there is a lot to like in the August Jobs Report, it is important to understand where we are in the overall US business/labor market cycle:

  • The only slack in the system is either in less-educated workers or those who have not historically considered themselves “in the workforce”.
  • That means it will be harder to show a consistent increase in US jobs going forward. Case in point: last month’s +130,000 print compares to a 2019 average of 158,000/month and a 2018 average of 223,000/month.
  • Also worth noting: corporate profit margins are down this year, but lower interest rates have buoyed stocks and limited the pressure on managements to cut costs/workforces.
  • Lower rates have also limited the damage to US equity prices from uncertainty caused by the US-China trade war, which otherwise could have also pushed companies to lay off workers.

The upshot: August’s Jobs Report is a sign of things to come. Overall job growth will be tepid, but the internals should remain healthy. That doesn’t fit the history of boom-bust cycles, but in the absence of an exogenous shock this is a reasonable base case through the end of the year and into 2020.

Paper on African American unemployment: