This content is reserved for clients only. Login Now

Register now for a free trial to gain access to this piece and see how
you can benefit from an RGE subscription.

Analysis

U.S. Employment Report Shows Prolonged Malaise

By Prajakta Bhide

EXECUTIVE SUMMARY

The U.S. Bureau of Labor Statistics employment report for July further dampened hopes of significant revival in the labor market. Leaving aside distortions from census-related employment, private payrolls were positive but weak, and substantial downward revision to earlier published estimates shows the labor market inertia. Any cheer derived from the unemployment rate holding steady in July should be tempered by the decline in the labor force that drove down the participation rate for the third consecutive month. On a positive note, the average workweek and hourly earnings, which had shown a worrisome contraction in June, both improved in July, while the duration of unemployment edged down slightly. In general, the data painted a picture of sluggish improvement, with very little traction in payroll gains in the U.S. labor market. The labor market appears to be stuck in a period of extended malaise.

For a more detailed review of the report, see the RGE Critical Issue "U.S. Labor Market: Private Payrolls Anemic; Labor Force Decline Keeps Unemployment Rate Steady."

The Good News

  • The private sector continued job creation in July, as payrolls rose by 71,000. The average workweek for private employees rose by 0.1 hour to 34.2 hours, while average hourly earnings rose 0.2% m/m in July, up 1.8% y/y. These developments are welcome given that both these gauges had shown worrisome declines in June. As the average workweek remains well below pre-recession levels, firms will increase work hours before adding payrolls. Meanwhile, the boost to hourly earnings is positive for consumer spending. The household survey, which showed an ugly 166,000 drop in private employment, recovered in July with a gain of 129,000.
  • The diffusion index of employment, an indicator of how widespread gains in payrolls are, improved in July to 55.6 after falling to 55.2 in June. (Values above 50 indicate there are more industries adding payrolls than cutting payrolls.)
  • Manufacturing, a sector we have been watching very closely, showed continued gains in payrolls in July. Manufacturing payrolls rose by 36,000. Manufacturing hours worked per week rose 0.1 hours to 41.1 after contracting in June, while overtime hours remained unchanged at 3.8 after declining in June. These developments may reflect the effect of fewer than usual summer shutdowns in the auto sector. The good news is that in July, the labor market didn’t suffer from the clear weakening in manufacturing activity.
  • The median duration of unemployment slid slightly in July to 22.2 weeks, from the record high of 25.5 weeks in June. The duration of unemployment reached record levels during the recession and remains worryingly elevated despite the slight decline in July. A high duration of unemployment can cause skill deterioration and low morale among discouraged job seekers.

The Bad News

  • Private payrolls gains were much weaker than hoped and well below consensus estimates; moreover, revisions to previous months’ data show that after the promising jump of 241,000 in April, private payrolls averaged a meager 41,000 in May and June.
  • Leaving aside the payroll decline of 143,000 from temporary census workers, government employment declined across all categories—including state and local government. This dragged the ex-census non-farm payroll employment number even lower, to show a paltry gain of 12,000. This is extremely disappointing—the economy needs to create around 125,000 jobs just to maintain the unemployment rate. With private sector hiring on an anemic trajectory and government employment in a funk, pressure on the unemployment rate will remain upward. RGE expects the unemployment rate to peak at 10.1% in Q1 2011.
  • In July, the unemployment rate remained unchanged at 9.5%. While some may find cheer in the fact that it didn’t climb, the rate only held steady due to a contraction in the labor force. In July, 181,000 workers left the labor force, causing the participation rate to fall for the third consecutive month, down to a record low of 64.6%. The U-6 unemployment rate, which includes marginally attached workers and workers in part-time employment for economic reasons, remained unchanged at 16.5%.
  • An alternative measure of employment—the employment-to-population ratio—decreased for the third consecutive month, falling to 58.4% in July from 58.5% in June.
  • Temporary employment fell. This is a leading indicator of labor market recovery since firms will hire temporary workers before boosting payrolls in the early stages of a recovery. Gains in temporary employment began in October 2009, peaking around the beginning of 2010. In July temporary employment fell back by 5,000. We wish we could say that firms are now beginning to hire full-time employees in earnest, but the disappointing private payrolls data is showing us otherwise.
  • The diffusion index of manufacturing sector employment continued to fall in July, down to 50 from 53 in June. This dovetails with the visible weakening in manufacturing surveys in recent months. In July, the ADP report showed that manufacturing payrolls fell by 6,000, declining for the first time in six months. The manufacturing sector has been a bright spot in the labor market, creating 183,000 jobs since January 2010, with monthly gains peaking in May. In coming months, the labor market is likely to suffer from waning support from the manufacturing sector.

In sum, we saw some positive developments in July. However, the good news—positive developments in work hours and wages and a decline in the duration of unemployment—was substantially outweighed by the harsh reality of an extremely anemic gain of 12,000 in non-farm payrolls ex-census. Private payrolls came in well below consensus estimates, and downward revisions to earlier data show that spring 2010’s promising gains were ephemeral. Around 125,000 jobs need to be created each month to prevent the unemployment rate from rising. The fact that only 12,000 jobs were created in July, six months after payrolls first turned positive, is of great concern. The labor market has sunk back into a period of prolonged malaise that will continue to weigh on the minds of consumers. This is evident in market reactions to the disappointing data: The U.S. equity market slid into negative territory, with the Dow losing 136 points and the broader S&P 500 index falling 1.4% at midday.

Register for a Free Trial