Downshift in Job Gains and Real Economic Growth
Payrolls grew by 80,000 jobs in June, after gains in April and May averaged 73,000. June job gains were concentrated in business services, manufacturing and leisure and hospitality. Weak hiring in education and health services, as well as retail trade, suggests below-trend gains in employment going forward. Government sector job declines were concentrated in the federal government, supporting the case for ongoing restructuring in the federal sector. On net, job gains remain positive. The private sector has added a modest average of 91,000 jobs over the past three months. Gains have been broad- based across major sectors, yet the pace remains disappointing compared to prior economic recoveries (top graph). We remain of the view that the U.S. economy continues to move forward at a subpar pace of growth, and that this pace will continue to incentivize households, private business and governments at all levels to continue to restructure in order to be efficient at a slower pace of growth.
Aggregate Hours Worked: Definite Second Quarter Slowdown
For June, the three-month average, annualized growth of the aggregate hours worked index was 0.9 percent, compared to 3.7 percent in March, the last month of the prior quarter (middle graph). The index is a core input to estimates of real growth and, as such, the index reaffirms our outlook for sub-2 percent GDP growth in the second quarter. Productivity at this stage of the recovery also tends to moderate and we have witnessed this in recent quarters. As a result, we maintain our view that growth in the second half of this year will slow further.
Unemployment, Wages and Income
Out-of-normal behavior is also characterized by the unemployment rate as well as by wages. In June, average hourly earnings for all workers were up 2.0 percent from a year earlier—an improvement over the past two months. Meanwhile, hours worked has also improved. Therefore, the outlook for income has improved although, once again, the pace of income growth, as illustrated in the bottom graph, remains below the pace of prior recoveries. This economic expansion has not behaved in a similar way to prior expansions, as one can see in all three of the graphs in this report. The motivating factor in economics, as in baseball, is what you get relative to what you expect. In baseball, if the pitcher throws a slider when you expected a fastball, then you have a problem. In economics, the gain in jobs, income and overall top-line revenue has not measured up to the expectations of many households and businesses. Therefore, decision makers are adjusting and currently the bias is toward caution given the level of uncertainty on growth and income expectations.