Friday, September 3, 2010

The Employment Picture Brightens Up, Suddenly

The August employment report provides irrefutable evidence that the economic recovery is alive and well, moving forward at a reasonable enough clip to put "double dip"-related concerns to rest.

Not only did private payrolls rise by a moderate 67,000 last month but significant upward revisions to the prior two months in the overall numbers by a cumulative 123,000 jobs suddenly paint a more resilient labor market picture than previously thought.

The 54,000 decline in the headline payroll number for August is inconsequential, as it reflects the distortion caused by the layoffs in census workers for the month (-114,000).

Since last December's low, the private sector has created a total of 763,000 jobs in the first eight months of the year, meaning an average of 95,000 jobs a month. While the number is definitely short of where it ultimately should be (probably in the 200,000+ range), it is still respectable for an economic recovery the sustainability of which has often been called into question recently. The message here is that, despite the much-publicized defensive attitude by companies, the private sector is moving ahead with a pace of hiring that, while cautious, still indicates an irreversible forward momentum in economic growth.

Health care employment was up 28,000 in August, as the sector remains a steady source of job creation in private payrolls, having averaged about 20,000 a month so far in 2010. Construction employment was up 19,000 (reflecting in part the return to work of 10,000 striking workers in July), while manufacturing jobs fell 27,000 due to a sharp decline in motor vehicle production (the result of a different pattern this year for the industry's retooling process during the summer months).

The average workweek for all employees- a key predictor of future hiring- was unchanged at 34.2 hours in August, remaining at the high end of its range for the year.

Comparable gains in both the size of the civilian labor force and employment in the household survey (154,000 and 139,000 respectively) caused an uptick in the unemployment rate to 9.6%, which is right in the middle of the 9.5-9.7% range that has prevailed for the series since May. The stalled unemployment rate in the last several months reflects both the still moderate pace of private payroll growth and the unwinding of the Census workers.

By throwing cold water to the more pessimistic views of the economy expressed by some in the last few months, today's report represents a significant blow- at least for the time being- to the Treasury market's seemingly irrepressible summer rally, as it deflates expectations about additional quantitative easing by the Fed and helps tame the most intense concerns about the deflation risk. In fact, on that last front, one of the more low-key elements of the report, average hourly earnings for all employees, showed a solid gain of 0.3% in August, which translates into a 1.7% gain on a year-on-year basis. With wage increases holding up at a moderate pace, the deflation story becomes a little more difficult to rationalize.

Anthony Karydakis

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