Friday, July 2, 2010

Employment Growth Still in Search of Momentum

The June employment report held no major surprises.

The unwinding of 225,000 census jobs last month caused a 125,000 drop in overall payrolls, leaving private sector job gains at an unimpressive 83,000. Although private employment has increased by a total of 593,000 jobs since the beginning of the year (corresponding essentially to a gain of 100,000 a month), it remains below its December 2007 level by 7.9 million.

The health care sector continues to lead, in relative terms, job creation, turning out a 17,000 increase last month, while manufacturing (a key area of strength so far) showed a somewhat moderate by recent standards gain of 9,000. Retail trade -7,000, financial industry -15,000. Temp-help services up 21,000, following increases of 31,000 and 23,000 in the prior to months.

Although it is a component with an admittedly choppy month-to-month behavior, the 0.1% decline in the average workweek to 34.1 put an end to an encouraging uptrend that had been emerging since early spring.

On the face of it, and although it is a headline-grabbing number for the broader public, the somewhat unexpected sharp drop in the unemployment rate to 9.5% is a bit of a question mark as to its true significance. The decline was not part of any underlying strength in employment (as captured in the household survey) as that part declined by 301,000 (also affected by the laid-off census workers, but not by the exact number as in the establishment survey). Instead, there was a very sizable, but not unprecedented, contraction in the civilian labor force last month by 652,000, that accounts for the decline in the unemployment rate. Still, on a trend basis, there is no question that the unemployment rate has decidedly turned the corner from its 10.1% cycle-peak reached last fall.

Unemployment Rate

Source: BLS

All things taken into account, the employment data validate the impression that labor market conditions continue to improve but remain on a somewhat lower trajectory than needed to provide fresh impetus to the economic recovery imminently. The process of reaching a solid pace of job creation that would correspond to 200,000-250,000 monthly private payroll gains is proving to be a slower one that we had anticipated. A lingering resistance on the part of the private sector to more aggressive hiring reflects ongoing underlying uneasiness over the momentum of the recovery. This caution creates an inevitable self-fulfilling prophecy, in that it impedes the very momentum that economic activity needs to acquire to convince private companies to hire more quickly.

None of this puts the future of the economic recovery at risk but the latter appears increasingly likely to remain mired in a 3 to 3 1/4% growth range in the second half of the year.

Anthony Karydakis