Key Points

  • Last Friday’s payroll report was generally cheered as having Goldilocks characteristics, but a closer look is warranted.

  • Wage growth was weaker-than-expected, with low wage industries in the spotlight; while manufacturing employment data is also troubling.

  • Layoffs are picking up, while consumers are worried about future job opportunities.

The monthly payroll report is always closely scrutinized by economists and market watchers; perhaps even more so these days given the Federal Reserve’s decision to shift into neutral/pause mode earlier this year. After a dismal February, payroll growth rebounded in March; with nonfarm payrolls rising a higher-than-expected 196k, and slight upward revisions to the prior two months. The unemployment rate remained at 3.8%, which is slightly above a 49-year low; while the labor force participation rate dipped. Average hourly earnings (AHE) represents the proxy for wages, and they were up a less-than-expected 3.2% relative to a year ago—down from 3.4% in February. (AHE for production and nonsupervisory workers was up a little more at 3.3% year-over-year; and is the wage proxy in the charts below.)

Goldilocks?

Friday’s report was generally cheered as Goldilocks—not too hot, not too cold. But digging into the details yields some concerns worth noting. The number of jobs gained or lost each month comes from the payroll survey; while the unemployment rate comes from the household survey. Payroll gains averaged 180k per month in the first quarter, which is lower than last year’s average of 223k. Household employment actually fell by 197k in the first quarter, 48k of which was in the prime working age (25-54) category. That category has seen employment losses in four of the past five months. In addition, temporary employment, which is a leading indicator of job growth, fell by 5k.
It’s too soon to judge whether the weaker month-over-month and year-over-year AHE gain is a sign of a top in wage growth, but the convergence between the unemployment rate and AHE is worth watching as a recession indicator. As you can see in the chart below, historically once wage growth rolled over and the unemployment rate began to elevate, a recession was either underway or imminent.

Wages & Unemployment Converging

AHE vs Unemployment Rate

Source: Charles Schwab, Department of Labor, FactSet, as of March 31, 2019. Average hourly earnings for production and nonsupervisory workers.

There had been high hopes for higher wage growth. The widely-watched monthly small business survey from the National Federation of Independent Business (NFIB) has as one of its survey questions whether member companies are planning to raise worker compensation. This percentage has historically led AHE changes by about two years, as you can see in the chart below (the NFIB line is advanced two years). Until the latest release, the surge in the percentage of small businesses planning to raise worker compensation in the next three months—from a recession low of 0% to the recent high of 25%—pointed to higher wage gains to come. The latest down move down to 18% will be troublesome if it persists; but a rebound would provide hope for higher wage gains to come.