Workers get fewer hours. Are a hiring slowdown, recession next?

Americans are working fewer hours, and that could be a worrisome sign for hiring and the economy.

The average workweek dipped to 34.3 hours in July, down from 34.5 hours both in March and a year earlier. That’s the lowest level and largest annual decline since early 2017.

The drop was sharper for lower-paid hourly employees such as production and non-supervisory workers.

The August jobs report, out Friday, will reveal whether the downturn in the workweek persisted last month or was a blip.

The biggest worry is that a shrinking workweek could foreshadow a pullback in job growth and even a recession. That’s because businesses often reduce the hours of existing employees – by paring back overtime or trimming the schedules of part-timers, for example – before scaling back hiring or laying off workers. Fewer hours also means smaller weekly paychecks for many Americans, prompting them to curtail spending.

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“I would make a case that a decline in hours worked is a precursor to a much broader slowdown in overall hiring,” says Joe Brusuelas, chief economist of consulting firm RSM.

The development is surprising because, with unemployment near a 50-year low, employers continue to complain that they can’t find enough workers.

“If it is so hard to find workers,” employers should be giving current workers more hours, not less, says Philippa Dunne, a labor market analyst and co-editor of the Liscio Report, a research publication.

A shorter workweek is the latest early warning signal of a possible recession on the horizon. Among other red flags, short-term bond yields have climbed above long-term rates, reflecting a dim outlook. Earnings of Standard & Poor’s 500 companies have dipped for two straight quarters, according to FactSet. And an index of manufacturing activity last month showed contraction for the first time since 2016.

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Trade war creates uncertainty

Behind much of the slowdown is President Trump’s escalating trade war with China, a sputtering global economy and concerns about a Brexit – the United Kingdom’s imminent withdrawal of from the European Union – that doesn’t include trade and other deals, says economist Ryan Sweet of Moody’s Analytics.

“We have a lot of uncertainty around trade, and businesses are cutting back because they’re not sure what’s” going to happen, Sweet says.

Manufacturers, which, along with farmers, have been most directly affected by the trade battle with China, posted the sharpest decline in the workweek in July, with average hours slipping to 40.4 from 41 a year earlier. Automakers, meanwhile, have been battered by a slowdown in car sales.

Britax, which makes premium car seats at its factory in Fort Mill, South Carolina, has had to pay a 25% tariff on imported fabrics from China since May, says Robert McCutcheon, president of the Americas for the 300-employee company. That duty is set to rise to 30% October 1. And a 15% tariff on metal parts from China took effect Sunday. In total, Britax plans to raise prices 5% to 10% next month to offset the higher costs, McCutcheon says.

Yet dozens of the company’s competitors, which generally make their entire car seats in China, have been exempted from the levy. If Britax loses sales because of the higher prices, as McCutcheon fears, it would be forced to reduce production and workers’ hours this fall, he says.

“It absolutely can have that effect,” he says. “It’s been a lot of uncertainty.”

Hours were also noticeably down on an annual basis in retail, which is starting to feel the effects of the trade fight, and leisure and hospitality, which includes bars, restaurants and hotels. And among hourly workers, the workweek was down in the information sector– which includes movies, broadcasting and telecommunications – and financial activities.

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Sweet says the uncertainty generated by the trade fight has spilled into the service sector as businesses worry that tariffs on Chinese goods will increase consumer costs.

Some economists, however, are downplaying the significance of the decline in weekly hours. In a report, Goldman Sachs noted the monthly data is volatile. Thus, the big drop in July could be a one-off.

Ranks of temporary workers also down

A possible counterargument to that view is that the number of temporary workers dispatched by staffing firms – another gauge of future hiring – has fallen by 26,000 so far this year after rising by 83,000 in 2018. Employers often cut temporary workers before slowing the addition of permanent ones or doing layoffs.

Even if the workweek really has fallen, Goldman doesn’t believe it foreshadows a drop-off in hiring. Rather, the firm says, the decline in hours can simply reflect the current business uncertainty and slowdown in economic growth. The economy grew at a 2% annual pace in the second quarter, down from about 3% in the first quarter and last year. And average monthly job growth has slowed to 165,000 this year from closer to 200,000 in prior years.

If recession fears are overblown and the trade war and global troubles don’t derail the record 10-year-old economic expansion, employers actually could ramp up hiring in the months ahead to play catch-up after trimming hours, Goldman says.

Here’s the problem: A pullback in hours means less pay, and spending, for many workers. The average weekly earnings of private-sector employees grew 2.6% annually in July, down from 3.1% year earlier.

A short-term drop in hours is manageable but a slide that lasts into next year may not be, Sweet says, noting consumer spending has been the engine driving the economy.

“If that begins to chip away, we’re going to have problems,” he says.