Break in concentration?

Summary

Overall job growth has remained robust over the past year. Nonfarm payrolls (NFP) have expanded by an average of 230K per month, bucking expectations for a sharp slowdown in the wake of the FOMC's rapid tightening in monetary policy. An outsized share of these gains have been concentrated in a few industries that have lagged the broader recovery and/or been more insulated from the Fed's efforts to tamp down demand. Specifically, the healthcare, government and leisure & hospitality sectors have accounted for 66% of job growth since last June even though they comprise just 36% of employment. These sectors' ability to plow ahead with hiring has offered an important source of support to income growth and consumer spending growth. How much more runway remains for these industries to buoy payroll gains?

Healthcare: Healthcare payrolls have expanded by an average of 65K jobs per month over the past year, roughly three times the pace registered from 2017-2019. Solid demand growth resulting from higher rates of insurance coverage and rapid population aging is likely to keep headcount rising at a brisk clip. However, the industry's level of employment has returned to its pre-COVID trend, leaving less scope for "catch up" hiring to bolster its monthly run-rate ahead.

Government: After an initially slow start in recovering jobs this cycle, the public sector has added an average of 51K jobs per month over the past year, far exceeding the 12K monthly average in the three years prior to COVID. The recent breakneck pace has come not only from the need to restaff but the means to do so. Yet while the finances of state & local government— which account for about 90% of public sector payrolls—are still strong overall, they have started to erode. With employment in the sector already back to its pre-COVID trend, some moderation in the monthly pace of hiring appears in store.

Leisure and hospitality: Having added an average of 35K jobs per month since last June, the leisure & hospitality sector has accounted for 15% of payroll gains. With employment in the industry still nearly one million workers below its 2017-2019 trend, we see room for this category to remain an outsized contributor to job growth in the months ahead. But slowing demand, the industry's dizzying jump in labor costs in recent years and room to extend existing workers' hours lead us to doubt that the trend in hiring can shift beyond its recent pace.

On net, we expect these three categories to continue to provide a sizable lift to the monthly rate of payroll gains that surpasses their pre-pandemic contribution and helps keep payroll gains afloat despite the current weight of monetary policy. That said, the gap between each of these industries' recent run-rate and their pre-COVID pace is likely to narrow ahead amid less scope for catch-up hiring, a less robust financial position and/or slowing demand. As such, they are likely to provide a smaller lift to the overall pace of job gains, raising the likelihood that payrolls growth slows more meaningfully ahead. We look for NFP gains to downshift to about a 150K monthly pace over the next 12 months amid a smaller contribution from recent industry standouts and diminishing appetite for employers to hire more broadly.

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