Payrolls Continue To Recover but the Labor Market Is Still Hurting
Mixed messages about business and labor market conditions have been delivered in a series of employment-related reports in the past few weeks. Payroll jobs continue to rise, but many people are still out of work even as more and more of the country reopens. Continued turmoil in the labor market could lead to postponed commercial real estate decisions from businesses looking to lease space, especially those in the accommodation and food services industry. Monthly nonfarm payrolls in June grew by 850,000 jobs, the highest number reported since August 2020 according to data provided by the Bureau of Labor Statistics. Given that the Band-Aid of government support is starting to peel off, the June figure exceeded many economists’ expectations. Yet payrolls remain in a 6.7 million jobs deficit from pre-pandemic levels, and even at June’s healthy pace, the job recovery will persist through February 2022.
There were few surprises in June’s employment figures at an industry level. The service sector continued to rebound as consumers release pent-up demand for dining out, traveling and shopping. These industries, which tend to occupy retail space, include food services such as bars and restaurants, arts and entertainment, retail trade and other services such as spas, laundry and auto shops. Hotels have brought workers back as occupancy rates climb, but labor shortages have reportedly held back a more robust return to pre-pandemic employment levels. Overall, almost half of June’s job growth occurred in these industries, but there remains a 1.7 million job deficit in accommodation and food services alone relative to pre-pandemic levels — more than any other industry.
Meanwhile, construction employment fell by 7,000 jobs as the industry grapples with higher building costs. Here there is a 238,000-job deficit compared to pre-pandemic levels, but that could soon change as a proposed federal infrastructure plan could provide a healthy boost to hiring in the construction industry.
The unemployment rate edged higher over the month from 5.8% to 5.9% , but one month does not a trend make. This data is derived from a survey of households, and can be volatile. For example, the unemployment rate increased in 26 months between 2012 to 2019, during the longest economic expansion in U.S. history, when the unemployment rate lingered below 4% for almost two years.
Yet, while the current unemployment rate is retreating from its peak of 14.8% in April of last year, it may not yet be comparable to pre-pandemic lows as the labor force is quite different today. More than 5 million workers have dropped out of the labor force since February 2020 through retirement or having simply stopped looking for work. At the same time, the ranks of the unemployed have swelled by 3.8 million, now reaching 9.5 million — a number not seen since August 2014 — with almost 4 million of them having been unemployed for more than 26 weeks.
Despite the sky-high number of unemployed and record-high job openings, jobs are apparently going unfilled. There were 9.2 million job openings at the end of May — the highest number ever reported by the BLS in the "Job Openings and Labor Turnover Survey" in the report's 20-year history. Here again, pent-up consumer demand for services is leading many hotels and eateries to ramp up hiring. But by the end of May, almost 10% of positions in the accommodation and food services industry remained unfilled, compared to about 5.3% in February of last year. Arts and entertainment, other services, and retail trade firms are also having difficulty finding workers.
The survey also tracks job separations, and quit rates specifically serve as a proxy for labor market sentiment as workers are more willing to leave a job voluntarily when they feel confident in their prospects for finding a new job. The quit rate fell to 2.5% in May after a record-high 2.8% in April, but this is still quite high compared to pre-pandemic days, when the quit rate held fairly steady at 2.3%.
Competitive hiring and elevated job openings are leading to higher wages, but not by a lot. Average hourly earnings in the private sector grew by 0.3% in June, just below the recent pace of inflation.
Hourly wages in the leisure and hospitality industry, which includes accommodation, food services, and arts and entertainment jobs, grew by 2.3% over the same period, the fastest of any industry, and as a large industry sector, likely a weighty contributor to that 0.3% gain. But at $16.21 per hour this is also the lowest average hourly rate earned. Widespread wage gains are not really occurring yet across most industries.
While last week’s data showed a rise in initial claims for unemployment benefits, continued claims for unemployment remain stubbornly high. Nearly 15 million workers received unemployment benefits during the week ending on June 18, including regular benefits and those receiving benefits through pandemic-related programs.
Benefits from pandemic-related programs are set to expire after the first week of September, but roughly half of the states are voluntarily ending them earlier. Those additional benefits may have hampered the job recovery by allowing some workers to sit on the sidelines rather than return to work, especially in the leisure and hospitality industry where average weekly earnings hover around $400 per week, not much more than those benefits.
The Week Ahead ...
After all the talk of inflation, the Department of Commerce and the Census Bureau are set to release three measures of price increases this week, all for June: the consumer price index, producer price index and import price index. All should generate new headlines, of course, as they sprint higher, with firms trying to pass higher costs on to consumers and commodity and crude oil still on an upward trend.
At the end of the week, the retail sales report for June should arrive. Sales have moderated as consumers start turning their spending away from durable goods and towards services, such as travel and entertainment, which are not included in retail totals. But spending at bars and restaurants, which is included, should continue to rise as more establishments reopen to full capacity. However, that might not be enough to offset the drag on sales from spending on goods.