The Employment Situation
Compared to other cycles the drop in employment this cycle looks perfectly normal, as it is right on the average of the four pre-1990 cycles. The real question is how long employment continues to fall and there was little or nothing in the recent economic data to suggest that employment is on the verge of bottoming. This is especially true when you look at the last two weeks large increases in initial unemployment claims. These large jumps in claims occurred after the data was collected for the employment report and suggest that employment will fall again next month.
We now see that both major measures of employment are showing a year-over-year decline.
But maybe the biggest news in the employment report was that hours worked fell -0.4%, the largest drop this year. The hours worked data incorporates both the job loses and the sharp rise in part time employment we are seeing this cycle. But the hours worked data appears to be accelerating on the downside. It clearly suggest that we are starting the third quarter on a very weak note.
The Fed is reportedly worried about wage growth, but my model says that weakness in the economy is more than offsetting the rise in inflation expectations and employees desire to offset recent inflation with larger wage gains. There is essentially no evidence of the start of a wage-price spiral.
Finally, the combination of slowing wage growth and falling hours worked means that nominal wage and salary growth is slowing sharply. So the critical question becomes where will the consumer get the real income to finance increases in consumer spending. Maybe a collapse of oil and food prices could do that, but so far the weakness in oil and other commodity prices does not appear sufficient to generate large increases in real income.