2018 Was a Super Year for Job Growth. Will Demand Slow This Year?

 

Roy Maurer By Roy Maurer January 8, 2019
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​The year 2018 was a very good one for the labor market, but there are signs the country's jobs expansion is approaching its limits, and economists are trying to ascertain exactly when—no longer a question of if—a slowdown will be felt in the year ahead.

The unemployment rate held at 3.7 percent from September to December, before ticking back up to 3.9 percent, and hiring has been bullish all year, months after a falloff was expected. The whopping 312,000 jobs added in December made it the 99th consecutive month of growth―double the previous record.

"In 2018, the unemployment rate fell to a near 50-year low, more than 2 million jobs were added, and wage increases began to accelerate," said Ahu Yildrimaz, vice president and co-head of the ADP Research Institute.

"Job growth picked up, and workers have continued to find jobs—a pleasant surprise at this point in the economic cycle," said Jed Kolko, chief economist for job search engine Indeed.

Martha Gimbel, research director for Indeed's Hiring Lab, said monthly payrolls grew by 220,000 on average—stronger gains than in the last two years, even though job creation typically slows as a recovery ages and the economy reaches full employment.


Mining, construction, and professional and business services were the top three industries for job growth, according to payroll data analyzed by the ADP Research Institute. Information jobs, including media, was the worst performing sector in 2018.

"More people returned to work this year," Gimbel said. "Unemployment declined across gender, racial and educational lines. And the gains are reaching more corners of the country. Only two of the 100 largest [U.S. metropolitan areas] lost jobs, and employment is picking up even in left-behind rural areas."

Metropolitan Areas with the Lowest Job Growth

The following localities saw the least increase in jobs during the past fiscal year:

​Youngstown, Ohio
​-1.0%
​Louisville, Ky.
​-0.3%
​Knoxville, Tn.
​0.2%
​Jackson, Miss.
​0.6%
Wichita, Kan.​​0.7%
​Rochester, N.Y.
​0.8%
​Toledo, Ohio
​0.8%
​St. Louis, Mo.
​0.8%
​Daytona Beach, Fla.
​0.8%
​Milwaukee, Wis.
​0.8%

The U.S. labor market is the best on record for those without a high school degree. The unemployment rate for those older than age 25 without a diploma averaged 5.6 percent through the first 10 months of the year, driven by solid hiring in lower-skilled jobs.

Gimbel added that the ratio of employed people of prime working age (25 to 54) to the overall population—an important indicator of the share of people who are working—rose from 79.1 percent in December 2017 to 79.7 percent one year later. And the share of workers involuntarily working part time fell from 3.1 percent to 2.8 percent during that time.


"Even better, the tightening labor market brought rising wage gains in 2018," she said. Wage growth for private-sector workers topped 3 percent and could at long last be gaining momentum, especially in industries where labor is tightest, such as construction and technology. Even workers at the bottom of the earnings ladder, who were left behind early in the recovery, are seeing higher pay.

Wages increased nearly $1 per hour across all industries, according to ADP. The average wage increase for job switchers was 5.8 percent ($1.90), while job holders saw a 4.7 percent increase ($1.34).

Many economists believe that the good times still have legs.

Josh Wright, chief economist for recruitment software firm iCIMS, said he expects wages to continue rising in 2019, though not at an exponential rate. "I think we'll be above 3 percent, climbing toward 3.5 percent over the year."

And respondents to a recent National Association of Business Economists poll said the jobless rate in 2019 could fall to 3.5 percent, or even as low as 3.2 percent.

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Room for Improvement

The recovery from the 2007-2009 financial crisis and recession has unequivocally been reached. But some measures could still be better.

Wright pointed out that involuntary part-time employment for people with part-time jobs who would like to have full-time work could be lower and has ticked up in the last couple of months. As a share of the population, the number of people who are at optimal working age and are employed remains well below its 2000 peak.

"The prime-age-employment-to-population ratio, a more sophisticated version of the labor force participation rate, zeros in on the people who are in their prime working years," Wright said. "It has been depressed throughout the expansion and has recovered only to its prerecession level. There are also clear differentials in joblessness between different ethnic and racial groups, with African-Americans' 5.9 percent unemployment four years behind the national average." 

He added that wages and productivity should still see improvement in 2019. "Wage growth can't be called sluggish anymore, but it's only moderate, especially relative to the overall job growth and tightness in the labor market," he said. "Productivity remains the elephant in the room. The labor market is leading employers to spend more on training, building talent pipelines and investing in people. That should lead to a pickup in productivity, but how much and how quickly remains to be seen."

A Slowdown on the Way

Labor market economists have been anticipating the end of the recovery for some time. "Nothing lasts forever, including a booming labor market," Kolko said. "There are several reasons why the recent years of labor market growth probably can't be sustained. Whether these reasons hit in 2019 or later, they will inevitably come."

Wright said he expects a slowdown by the end of 2019. "The more important questions are when will it happen, and how deep will it be?" he said.

Factors to watch include a curtailing of hiring in the sectors—mining, construction and manufacturing—that led to extraordinary job growth in 2018, a working-age population that's growing older and continued interest-rate hikes. Other factors slowing the growth of the labor force, according to Kolko, are "immigration policies designed to reduce immigration, high housing costs pricing people out of tight labor markets, licensing requirements making it hard for people to practice their crafts in new places, noncompete agreements making it harder to switch to higher-paying jobs, and ungenerous child care and parental-leave policies holding back female labor force participation."

Fear of a full-blown recession, on the other hand, appears to be unwarranted. "A volatile stock market, spurred by mixed signals on trade, has stoked fears that the U.S. economy will take a sharp downturn in 2019," said Gad Levanon, chief economist, North America, for The Conference Board. "But those fears are overblown, and the stock market is overreacting."

Andrew Chamberlain, chief economist at Glassdoor, said that although there are many economic risks on the horizon—including steadily rising interest rates, a slowing housing market, tariff threats and mounting corporate debt—the odds of a recession in 2019 remain low. "Despite growing uncertainty, most economic indicators today still suggest a recession is unlikely over the next six to 12 months," he said. "However, while the economy may not falter anytime soon … it is overdue for a pullback."

What It Means for Employers

The labor market today is defined by low unemployment and a record number of open jobs.

"That's pushing up costs in many industries as more employers struggle to fill jobs," Chamberlain said. "Although average pay has been rising slowly for years, in 2018 average wages grew at the fastest pace in nine years, a sign that labor costs are on the rise for U.S. businesses."

A slowdown will affect employers' bottom lines, Wright said. "We could see a drop in job postings, a decrease in hiring or a pickup in layoffs, although employers tend to be loath to take that last step prematurely and would rather wait and see how the market turns out."

Attracting candidates to open roles will become easier in a downturn, Chamberlain said. "However, the problem of sifting through bigger applicant pools can make for more challenging work. Investing in interview processes that work and technology that helps screen great candidates, and having a clear employer brand that attracts the right talent can help prepare employers to hire effectively during a slowdown."

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