We expect the labor market will reflect a slower pace of growth through the second quarter, resulting in a below-consensus estimate (165,000) net increase in total employment of 147,000 jobs and an increase in the unemployment rate to 3.7%. In our estimation, the primary narrative emerging from the June report will be sustained deceleration of hiring in the household survey, which results in the estimation of the unemployment rate and the continued pace of weak hiring in the manufacturing sector.
If the U.S. labor sector experiences a third sub-100,000 or so print over the past three months, financial markets will move to swiftly price in either a third rate cut in 2019 or a 50-basis-point cut at the July 29-30 meeting, despite the recent protestations of various Fed rhetoric. A near-consensus print would not alter the likely path of rate policy, which points toward two remaining 25-basis-point rate cuts this year.
Over the past three months, the household survey has averaged a loss of 64,000 jobs per month, which is in contrast with the 100,000 or so necessary to maintain a stable unemployment rate. Given the labor dynamics in the household survey that have emerged over the past six months, we think that the unemployment rate has bottomed for the business cycle and is poised to begin slowly rising as the economy moves back toward or below the long term-trend of 1.8% growth.
Manufacturing under pressure
We are growing more concerned about the pace of hiring in the manufacturing sector as the global growth slowdown in industrial production accelerates. Over the past six months, manufacturing has added an average of 2,000 jobs per month and only 5,000 in total over the past three months. Weak auto sales and production, disrupted supply chains linked to design problems with Boeing aircraft, and the impact of the trade war on the margin all point to a continuation of hiring weakness in manufacturing, with the risk of a negative print, given the aforementioned developments.On Monday the Institute for Supply Management Index–a key measure of U.S. manufacturing–fell to 51.7 in June, its third straight monthly decline.
In addition, trade and transport hiring has slowed noticeably over the past four months, and actually declined by an average of 5,000 jobs over the past three months, which is likely linked to the uncertain direction of trade policy out of Washington, DC. While, the “uncertainty tax” imposed by the shift to protectionist trade polices out of Washington has yet to extract a large price in terms of jobs, if the temporary truce in the trade war doesn’t lead to an equitable solution between Washington and Beijing, this will become an evolving narrative heading toward the 2020 U.S. presidential election.
On a three-month average annualized pace, average hourly earnings have decelerated to 2.7% from a cyclical peak of 3.4% in February 2019. Unless both the top line and household estimate reverse course and reaccelerate back toward hiring levels consistent with 2017-18, it is highly probable that the economy has observed a cyclical peak in wages. We expect a 0.2% increase in wages for June.
Since June tends to see volatility in education hiring, we think there is some risk of a softer pace of hiring on the month. That being said, traditional summer hiring of leisure and hospitality workers should get off to a strong start due to the solid increase in the pace of travel this summer, which will almost certainly be accompanied by solid rebounds in business services, goods producing and construction-related jobs.