Friday, August 6, 2010

Employment Picture: Frustrating But Not Totally Dismal

This morning's employment report was to a large extent uneventful and, as such, provided very little new insight into the underlying dynamic of the labor market.

While the unwinding of 143,000 Census workers dragged the headline payroll number down (-131,000), private payrolls rose by 71,000, which is roughly consistent with the number that the ADP survey on Wednesday would have suggested for July. One discouraging element in the data was the fairly substantial downward revision to June's private payrolls from an initially reported gain of 83,000 to an increase of only 31,000.

The implication of that downward revision is that in the first seven months of the year, private payrolls have now increased by 630,000, bringing their average monthly gain to 90,000 versus an average increase of 100,000 that was the case in the first six months of the year prior to this morning's release. Supporting the broader picture of a downshifting in the pace of economic activity in late spring is the fact that two thirds of the total increase in private payrolls so far this year took place in March and April.

Manufacturing jobs turned out a solid gain last month (+36,000) but they benefited considerably from fewer seasonal layoffs in the auto industry, the latter accounting for 21,000 of those jobs. A modest bright spot in the data was a small gain in retail jobs following sizable declines in the previous few months. However, given rising uneasiness expressed in recent days about back-to-school sales, it will be interesting to see whether a reversal in that jobs category is in order for this month.

The battered state and local governments shed a combined 48,000 jobs in July, underscoring the reality that the dismal state of their finances continues to represent a headwind for the prospect of an acceleration in both job creation and overall economic growth over the next few quarters.

A 0.1% gain the average workweek for all private employees to 34.2 hours helps maintain the series at the upper end of its range for the cycle, holding out the promise of a pick up in the pace of hiring in the coming months.

The unchanged unemployment rate at 9.5% was the result of relatively proportionate declines in both the size of the civilian labor force (-181,000) and household employment (-159,000) for the month. Given the current trajectory of job growth, and allowing for a modest improvement later in the year, the unemployment rate is on track to end the year around 9 1/4%, broadly in line with the Fed's most recently revised forecasts.

By failing to provide any surprises to the upside that would reinvigorate expectations of a significant pick up in the pace of hiring ahead, the employment report tended to solidify the perception of an economic recovery unable to build any measurable momentum, and it may have actually lost some in the late spring-early summer period. However, there is a need to maintain the sharp distinction between such an admittedly disappointing reality and the talk that has resurfaced recently about a double-dip scenario.

As we have argued before, the latter scenario remains a highly unlikely outcome, and, in our article yesterday in this space, we showed that, recent history suggests, that it takes considerably longer than just one year following the end of a recession for job growth to show any major acceleration ( Against that measure, the current pace of payroll growth is not particularly out of the ordinary for this phase of the economic recovery.

Anthony Karydakis