U.S. Labor Market Has Some Significant Weak Spots
(Bloomberg) -- It’s difficult to discern given the incessant headlines lamenting the dearth of skilled workers, but something is amiss in the powerhouse U.S. services sector, which accounts for some 80 percent of the economy.
The headline figures say very little. The Institute for Supply Management’s April survey of non-manufacturing industries showed that activity slowed for a third consecutive month, dropping its index to the lowest since December. Still, at 56.8 the index is materially higher than the 50 mark that is the dividing line between expansion and contraction. Moreover, all 18 industries surveyed by ISM saw growth last month.
By the looks of things, the service sector is in fine shape. As the ISM itself said, “Overall the respondents remain positive about business conditions.” But there was this caveat: “The respondents have expressed concern regarding the uncertainty about tariffs and the effect on the cost of goods.”
The April jobs report from the ADP Research Institute was noteworthy in that the services sector created the fewest jobs since November. And the U.S. nonfarm payrolls data show service sector job growth has averaged just 135,000 over the past six months, a marked slowdown from 2016’s monthly average of 170,000. As for what the future holds, take a look at the Challenger, Gray & Christmas monthly survey data. It showed that in the first four months of this year, employers announced 176,460 job cuts, an 8.4 percent increase from the 162,803 reported in the same period of 2017.
It would be easy enough to assign all of the blame to the retail sector. There is ample evidence that the bloodshed in this sector continues. Some 64,370 job cuts have been announced this year thus far, a 28 percent jump over 2017. According to Challenger’s tracking, 2,460 retail stores have closed this year on top of the 9,241 that shuttered in 2017. But the story is broader than one sector. Health Care/Products job cuts total 17,450 this year, up from 11,269 over the same period last year. It’s key to note that the trend in this sector has accelerated in recent months. Meanwhile, the service sector announced 14,665 cuts, up from 8,263 last year.
John Challenger, the firm’s chief executive officer, has been a flag bearer of the positive labor market trends in the current recovery, so it was notable that he warned “an increase in large-scale job cut announcements could be on the horizon.”
Challenger has been at the helm of his firm for two decades, so it likely hasn’t been lost on him that the past six months have seen $1.53 trillion in announced mergers and acquisitions, which would make 2018 a record year for deals if they are all completed and top the previous high set in 2015. Challenger has seen this M&A film before and knows how it ends. After deals close, “synergies” are extracted, which is a polite way of saying layoffs happen. While the number of firms in the Challenger survey citing M&A as the reason they cut jobs pales in comparison to closings, M&A as the culprit is nevertheless at a 12-month high.
With M&A as a fresh driver, the jobs bifurcation that’s emerged between the goods-producing and services sector is likely to persist until supply chains have been replenished and the inventory rebuilding concluded. With the threat of tariffs, though, it’s conceivable that the gap widens.
It has always been the case that goods-producing workers collect a fatter paycheck vis-à-vis their services-providing counterparts. The downside, of course, is the secular decline in manufacturing which has decimated the ranks of manufacturing employees. It is still remarkable that average weekly earnings for the goods-producing sector are running at 4.7 percent over last year versus those of the services sector, which are up by only 2.3 percent.
The wage gap would be even more pronounced if not for the record number of hours factory workers are clocking. Service-sector workers have seen the opposite, a veritable flat-lining in their workweek.
While no doubt a welcome development for goods-producing workers, there is a real risk that this trend will burn itself out. Second-quarter gross domestic product could well be the peak for the current cycle if there is no follow-through in demand following the panic buying ahead of potential tariff impositions, evidence of which is apparent in the Challenger data. Companies announced plans to hire more than 350,000 employees in the first four months of 2017, far above the 210,000 in actual hires.
More than any other data, the need to hire workers speaks to demand building in the economy’s pipeline, or lack thereof. The message may continue to be lost in the noise, but it’s increasingly likely that the recent weakness in the services sector is anything but an aberration.
©2018 Bloomberg L.P.