A subdued rebound

August 28, 2024

Payroll employment is expected to rise by 145,000 in August, after rising by only 114,000 in July. The seasonal adjustment can wreak havoc on the initial report for August, when many schools reopen. That could dampen the rebound in hiring for public education at the state and local levels. State and local revenues disappointed last year after surging in fiscal 2024, which means we could see some belt-tightening in fiscal 2025. Most state and local governments start their fiscal year during the summer, ahead of the federal government on October 1.

Private sector payrolls are expected to rise by 110,000, with gains in health care and social services the primary driver of those gains. AAA is expecting travel over the Labor Day Holiday to move above the highs of last year. However, hiring in the leisure and hospitality area has abated in recent months.

Manufacturing activity is expected to remain weak, as inventories are drained. Vehicle dealers are struggling to unload inventories and have sweetened incentives, something unimaginable just two years ago, to help clear dealer lots.  

New home sales picked up with a drop in mortgage rates in July, but refinancing activity remained the primary driver of mortgage applications. Existing home sales continued to weaken. Other expenses, including homeowner’s insurance are weighing on affordability and curbing the ramp-up in construction activity associated with lower mortgage rates.

Back-to-school spending is expected to remain solid but not spectacular this year. Consumers have grown more discerning in how they spend their paychecks, which has boosted discounting and slowed the pace of hiring in retail trade. The slowdown in housing activity has been harder on big-ticket furniture and appliance sales versus other categories. Remodeling and repairs are strongest when churn in the housing market is much higher, although we have seen older homeowners tap their home equity lines of credit this year to make upgrades to ensure that they can age in place. Online spending continues to grab a larger share of consumer wallets. High-income households tend to shop online more than low-income households and are less constrained by the high level of prices.  

Average hourly earnings are expected to rise 0.3% after rising only 0.2% in July. That translates to a 3.7% pace from a year ago, only slightly faster than the 3.6% pace we saw in July. Average hourly earnings are expected to log the weakest quarterly growth rate since the second quarter of 2021 in the third quarter of this year. We are rapidly approaching the 3.3% pace of wage gains we saw in 2019, but productivity growth has picked up from its trend in the 2020s, which should enable workers to keep more of those earnings without triggering more inflation. Hours worked are expected to pick up slightly on the wake of Hurricane Beryl. The Bureau of Labor Statistics said that Beryl had little impact on the July monthly employment report but did show a record-breaking 461,000 workers out of work due to bad weather during the month. Many businesses in Houston were idled due to power outages and flooding.

Separately, the unemployment rate, which is derived from the household survey, is expected to slip to 4.2% in August from 4.3% in July. Those out due to poor weather conditions are expected to recede to seasonal norms, along wit those out due to childcare problems. Kids returning to school should alleviate some of the crisis in childcare for working parents. We saw a surge in those out due to childcare problems as schools closed for the summer.

Federal Reserve Chairman Jay Powell underscored that much of the rise in unemployment we have seen over the last year is due to an increase in participation in the labor force, not a surge in layoffs. However, he appeared much more committed to a September cut in rates than many of his colleagues in his comments at this year’s Jackson Hole Symposium. The ranks of those being forced to work part-time instead of full-time and those on temporary layoffs increased in July. We will be watching those figures closely for more cracks in the labor market. The job opening and labor turnover survey for late July is due out next week. The pace of hiring and quits have both slipped well below the pace we saw pre-pandemic this year. That and the sharp downward revisions we saw to last year’s establishment employment, suggest that higher rates may be having a larger effect on the demand for labor than previously realized. Those are key statistics to watch along with the payroll report as the Fed weighs the size of its first cut in September. We still think a half percent cut is possible, given the dovish tenor of Powell’s address. His legacy depends on his nailing a soft landing.