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Employment gains moderate

Construction, healthcare and leisure and hospitality are adding jobs.

Payroll employment is expected to rise 180,000 in June, a slight slowdown from the 209,000 of May. The private sector is expected to rise by 135,000, about the same as we saw in May.

Gains in government have picked up noticeably in recent months and are expected to once again lead overall payroll gains. State and local governments are flush with cash and spending it. Funds allocated during the pandemic to upgrade infrastructure, including public schools, are being deployed much faster than anticipated. This is blunting the blow to employment triggered by rate hikes from the Federal Reserve.

Construction employment has held up despite the drop in home sales. Builders are offering mortgage buydowns and moving downscale to buoy buyer demand. This is at the same time that incentives for chip and EV plants have triggered a flurry of new construction in the manufacturing sector.

Healthcare is catching up and beginning to replace jobs lost to retirement and the stress of the pandemic. These gains have yet to fully alleviate the backlogs in the healthcare system.

Leisure and hospitality continued to add jobs. TSA throughput over the Fourth of July holiday week hit a new record. I bore witness to that, stunned that Chicago O’Hare appeared as crowded as I have ever seen it at 5:45 am on July 1. That should show up as an elevated number of people off work due to vacation in the household survey. Travel abroad, which is considered an import, has picked up relative to domestic travel.

Blistering heat has kept more people inside across much of the South and West. Everything from amusement parks to outdoor malls and in-store retailers is feeling the burn. Online retail is holding up better, but that isn’t enough to derail the downsizing in the freight industry. Bankruptcies are on the rise.

Strikes could complicate the Fed’s calculus on whether to raise rates again in September.

Hiring in professional business services, which had been a key driver of job gains, is expected to continue to moderate. Hiring in professional, scientific and technical services remains the strongest with an extra boost from GenAI. New business formation in the sector remains robust. The only sector to see a major slowdown in new business formation is the information sector, which spans entertainment and streaming to traditional tech startups.

Average hourly earnings are expected to rise by 0.3%, a tick down from the 0.4% increase in May. That translates to a 4.3% increase from a year ago. Wages on the job posting sites have moderated significantly in recent months, which suggests the options to job-hop are diminishing.

We will see new data on quit rates next week as well, which should moderate but remain above pre-pandemic levels for the overall labor market. The one sector in which quit rates have dropped below pre-pandemic norms is professional business services, where the most aggressive hiring occurred in the wake of reopening.

That is still above the pace the Federal Reserve considers consistent with its 2% inflation target, barring a pick-up in productivity growth, which cannot be ruled out. A slowdown in churn and fewer staffing shortages due to people being out sick appear to have boosted productivity growth in the second quarter. The challenge this summer is the prolonged heat wave, which tends to lower productivity growth.

Separately, the household survey is expected to show that the unemployment rate held at a 3.6% rate, the same as in May. Participation in the labor market is expected to hold at 62.6%, well above the lows emerging from the pandemic but still below pre-pandemic levels. Prime-age workers are coming back in droves. The problem is the retirements, which continue to rise with the aging of the baby boom. Participation among those over 65 remains suppressed relative to pre-pandemic norms.

It is still too soon to see the effects of the one-two punch of the writers’ and actors’ strikes. They could take a large toll on payroll employment and unemployment in August. Many of those workers are contractors and not eligible for unemployment insurance. Those who can will pick up extra jobs. Those working directly in the movie and production industry top 470,000, many of whom will be looking for other ways to support themselves. The UAW is also threatening to strike in September. Those strikes could complicate the Fed’s calculus on whether to raise rates again in September. 

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Image of Diane C. Swonk
Diane C. Swonk
Chief Economist, KPMG US

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