Modest Gains in August Hiring a Good Omen

Practical Economics

Modest Gains in August Hiring a Good Omen

Look past the official count of job losses in August: Private employers are adding to payrolls.

Job growth is only likely to get better from here on in, with monthly gains exceeding 100,000 by year-end. A 60,000 increase in payroll numbers in August -- after accounting for the loss of 114,000 temporary government workers employed by the Census Bureau -- makes eight consecutive months of gains in private company payrolls. The midyear economic soft patch is largely to blame for the modesty of the August uptick, as business activity barely crept ahead and employers remained skittish about hiring. While only mildly encouraging, that should help dispel fears of a double-dip recession, which we still view as unlikely.

In addition, there were some other encouraging aspects of the employment report. First, the government always revises the previous two months’ results -- in this case, June and July -- and the revisions were uniformly upward this time, for a net increase of 123,000 over preliminary estimates. Additionally, hiring of temp workers is again on the rise, increasing by 17,000 in August. July witnessed a small decline of 1,000 temp workers (initially reported as a 6,000 decline), which raised anxiety about job gains going forward. Since temp workers are the first to go, cutbacks in their employment frequently presage broader declines.

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Another notable aspect of the August report: The rise in unemployment, to 9.6% from 9.5% during June and July. This was expected, however, for reasons having to do with the unemployment insurance system. As federal funding for the long-term unemployed ran out in May, millions of people dropped off the rolls during June and July. This showed up as a decline in the labor force, presumably as many stopped reporting themselves as “looking for work,” a prerequisite for receiving benefits. But as funding was replenished in August and beneficiaries returned to the dole, the labor force predictably climbed. So the June-July dip was somewhat artificial.

The modest job gains of recent months will improve going forward, for two key reasons. First, as we’ve noted previously, the midyear economic slowdown seems due to a variety of special factors that are unlikely to persist or will reverse. The housing downturn and a pullback in consumer spending on energy efficient appliances -- both related to sunsetting tax credits -- and the loss of temporary Census workers fit the former category. The resumption of jobless benefits for the long-term unemployed fits the latter. Hence, economic activity should pick up from the summer doldrums in the months immediately ahead.


Second, the business cycle has now passed the familiar phase where employers can substitute productivity gains for hiring workers. The first year of an economic expansion always shows stellar productivity gains as employers strive to make due with their existing workforce. That was certainly the case this time around. Labor productivity advanced an impressive 6.3% for the year ending with the first quarter. Over time, however, the ability to eke more out of existing labor resources wanes and labor productivity slows. In fact, there was a decline in labor productivity during the second quarter, falling at a 1.8% pace. Future growth in output will require employers to add workers.