July Job Numbers Exceed Expectations

And a look at jobs and immigration

Guest blog by Dr. Tom Cunningham, Economist and MST Advisory Services, Senior Advisor- Economics 

The July Bureau of Labor Statistics jobs report echoed many of the past months’ reports in suggesting the U.S. labor market is strong. The 209,000 jobs added to the economy in July exceeded expectations of around 173,000. Strength was in food services, professional services and health services.  All other sectors were essentially flat; none lost ground.

The headline unemployment rate ticked down 0.1 percent to 4.3%, mostly a product of rounding as the actual rate fell from 4.357 to 4.350 percent. Still the rate is the lowest since May of 2001.

Year-over-year hourly earnings continued to grow at 2.5 percent, continuing the ongoing rather weak pace of growth, especially in light of such strong labor demand. The U6 rate, the broadest measure of labor underutilization that includes part-time workers and others not on unemployment rolls who would take full-time work, was unchanged at 8.6 percent, marginally higher than its 2017 low of 8.4 percent in May. The U6 rate could help explain a portion of the weak earnings growth.

The economy is becoming more bifurcated in terms of skills. High skill jobs are growing, as are low, those in the middle not so much. This is often cited as a reason for what has been somewhat of a “hollowing out” of our economy — fewer middle managers. mid-level employees, more high skill and low skill workers. 

On labor and immigration, a hot topic this past week, the overall sluggish rate of wage growth is one argument used by proponents of immigration-limiting legislation. We have seen job growth outpace working age population growth for a few years, but there hasn’t been much systematic upward pressure on wages. Proponents of limiting immigration suggest that constraining the inflow of foreign workers will help accelerate wages. At the same time, however, they recognize that there are labor shortages in some high-value areas, so they propose moving workers with those skills to the head of the line, albeit with an overall lower number of Green Cards.

In the near term, the answer to the question of where we get the workers to fill all the new jobs continues to be in labor force participation increases and in the gap between U3 and U6. There is some upward movement in employment to population ratio, but that upward movement is going to be limited by the aging nature of the population. In the long run, immigration is where the additional workers will have to come from, which has been a recurring theme in U.S. labor market history.

About the Author

Tom Cunningham holds a Ph.D. in economics from Columbia University and was senior economist with the Federal Reserve Bank of Atlanta from 1985 to 2015. Mr. Cunningham serves as a consultant to MST in the creation and ongoing development of the MST Virtual Economist and is the MST Advisory economics specialist. 

Why should lenders consider the monthly jobs report?

As employment is a key factor in projecting loan portfolio performance, current employment statistics and longer term trends are likely to be primary considerations for most banks and credit unions as they incorporate forward-looking economic factors in their ALLL estimations under the CECL accounting standard. 

How can lenders consider economic factors in estimating their reserves?

Under the new accounting standard, CECL, financial institutions will be required to consider economic factors in estimating their reserves. The MST Virtual Economist is an efficient, automated way to evaluate qualitative economic factors and project their impact on the institution’s loss rate, find new variables that impact the loss rate and determine the relevance of the economic factors you are already using to make qualitative adjustments. Click here for more information or to schedule a demonstration.