We forecast that nonfarm payrolls increased 205,000 in August, above consensus of 180,000 jobs and down from July’s large gain of 255,000.
Solid job growth combined with the previous releases of healthy gains in U.S. consumer spending and stronger-than-expected durable goods orders, new home sales and housing starts data should provide further confirmation that the U.S. economy is picking up steam following the weak first half of the year.
The release of a stronger-than-expected jobs report should also reinforce our expectations for one Fed funds rate increase of 25 basis points by the end of the year.
The historically low level of initial jobless claims, job openings hovering near record highs and cyclically high small-business hiring intentions reinforce our projection for solid job growth in the August report.
With the number of unemployed job seekers per job opening reaching historically low levels (see the chart below), it is not surprising that many clients have asked recently if the prospect of a shrinking pool of available workers could slow job gains in the coming months.
Despite the declining number of job seekers, we expect robust job growth to continue in the near-term as economic growth should pick up, accelerating earnings growth should stimulate business spending, and the resulting increase in consumer confidence should continue to support personal expenditures.
An analysis of historical month-over-month changes in employment at times of low job-seekers ratios highlights that job gains can remain robust despite the declining pool of available workers. For instance, since 2003, the median change in nonfarm payrolls when the number of unemployed job seekers per opening is less than 3.0 points is a healthy month-over-month gain of 171,000 jobs, very close to the 186,000 average monthly gain year-to-date.
A declining number of unemployed job seekers per opening can largely be reflected in a higher turnover in the labor market where workers are allocated within industries where they are most productive, in our view. This labor reallocation also allows an employee to improve his financial situation by quitting his current job when a more attractive opportunity presents itself.
In other words, a rise in the rate of job quitting can signal that workers are likely receiving more job offers and are confident about the prospects of a better job opportunity. The current environment appears to match well with this interpretation, as the quits rate, which is the number of quits divided by the number of employees who worked or were paid for work, is hovering at post-crisis highs.
Moreover, the economic status of workers is benefitting from this labor reallocation as the median year-over-year wage growth in the U.S. is close to a post-recession high (see the chart below). The bottom line is that we continue to expect the overall labor market to continue improving at a healthy pace, despite the historically low job seekers ratio.
On the other hand, we will closely monitor future changes in the job quits rate as this indicator tends to be a good leading indicator of wage growth. Finally, a topping in the quits rate, like the one observed on the graph below, could signal trouble ahead for the labor market as it did prior to the Great Recession.
