Job Growth Slackens as Pool of Available Workers Shrinks

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Employment increased by 138,000 in May after increasing by a downwardly revised 174,000 jobs in April.

During the past three months, job growth has averaged 121,000, well below its average for the previous year of about 190,000. This is not surprising; with unemployment rates reaching a ten-year low of 4.3%, employers are having more difficulty finding the workers they need to fill vacancies. In addition, the labor force participation rate has stopped rising for the time being, another sign that fewer potential workers remain on the sideline. Slowing job growth could actually signal that wages may start rising faster than the solid but unspectacular 2.5% rate for the past year, as the supply of available employees shrinks. The exit of higher paid older workers and the entry of lower paid younger ones is one factor constraining wage growth. Weak long-term productivity growth and modest current inflation numbers have impaired firm earning growth, another reason raises have been delayed. Still, if the labor market continues tightening, workers should eventually reap the benefits. 

Jobs in services have continued to grow robustly. However, these gains are largely confined to professional services and health care. Both wholesale and retail trade have lost headcount during the past three months. The department store sector in particular faces an uncertain future. The auto industry represents another area of concern as weaker sales numbers in 2017 may be causing carmakers to hold the line on payroll growth.

Though the pace of job creation has slowed, the Federal Reserve is still likely to raise rates in June given current labor market tightness. It appears to believe that weak first quarter GDP growth will not continue for the rest of the year and it is likely to take advantage of solid economic fundamentals to continue normalizing interest rates even though inflation remains below its two percent target. During the second half of 2017, expect one further rate increase and for the process of pairing down the Fed’s balance sheet to commence.

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