U.S. Labor Market Continues Its Slow-Motion Decline

The July decline in payroll employment was the seventh in succession since the beginning of the year (average monthly decline: 66,000). The manufacturing loss (35,000) was widely spread across industries. Construction fell 22,000, with all segments down (residential down 14,000, nonresidential down 7,000, heavy and civil engineering down 1,000). The construction decline is the smallest this year (the declines in the first six months averaged 45,000), which is an encouraging sign. The plunge in residential construction activity, while continuing, is now becoming less steep since activity has already fallen so far. But we do not think that stabilization in construction employment is around the corner, not least because we anticipate more weakness to come on the nonresidential side.

Private services employment declined for the sixth month in the past seven, this time by 30,000, worse than in June (17,000). The retail sector continued to shed jobs (down 17,000) while wholesale trade (down 17,000), and transportation and warehousing (down 6,000) also showed losses. The information sector lost 13,000 jobs. The financial sector saw stable employment, with a 4,000 loss in credit intermediation offset by an increase in other sectors. More job losses are in the pipeline here, though, given rising layoff announcements. High-end professional payrolls are still rising, as professional and technical services added 11,000 jobs. But employment services lost 34,000 jobs, of which 29,000 were in temporary help.

The only major pocket of strength in private services was healthcare (up 33,000). Education (up 5,000) and food services and drinking places (up 3,000) showed smaller gains than in recent months. The squeeze on real incomes from soaring gasoline and food prices may finally be hurting eating out. Government services employment rose 25,000, all in state and local governments (up 28,000). This strength remains a puzzle, given the pressures on state and local budgets that we expect to hurt hiring in the new fiscal year that began on July 1.

The workweek edged lower, falling to 33.6 hours from 33.7, hitting its lowest level since November 2004. A falling workweek is a bad sign for future employment changes. Overall hours worked declined by 0.4%, their fourth monthly decline in a row.

Hourly earnings were up 0.3% on the month and 3.4% over the past year, just the same as in June, a long way below the latest inflation rate (5.0% in June). That is bad news for consumers, but good news for the Fed in that it indicates that a wage-price spiral is not taking hold. Consequently, the Fed will be more comfortable keeping interest rates on hold.

The unemployment rate jumped up to 5.7%, from 5.5%, with young workers seeing the biggest increase. Teen unemployment is now over 20% (up to 20.3% from 18.1% in June). It is not that the summer influx of young job-seekers has been particularly large, just that they are facing a much weaker labor market. The adult unemployment rate (20 and over) also rose, to 5.0% from 4.9%.

Broader measures of labor-market underutilization show an even bleaker picture than the unemployment rate. The broadest measure—including not only the unemployed but also "marginally attached" workers and those who are working part-time because they could not find full-time work—now stands at 10.3%, up from 9.9% in June and from 8.3% a year ago. Increased part-time working is a key factor behind this shift.

The deteriorating labor market combined with high headline inflation keeps the Federal Reserve in a very difficult spot. We believe that job declines will probably accelerate later this year, since we see GDP growth turning negative in the fourth quarter as the boost from the stimulus payments to consumption fades. The Fed probably has a more optimistic view of the outlook, but will be aware that the risks to its view are to the downside. The Fed can also see that there is no evidence that wage inflation is being driven upward by high headline consumer price expectations. Consumers do expect high inflation—but they expect lower living standards as a result, not higher wage increase to compensate. The federal funds rate will hold steady at 2.0% at next week's Fed meeting, and the Fed should be on hold for a long time.