Vital Signs: Will Employment Get Worse?

On deck: employment report, ISM indexes for manufacturing and nonmanufacturing, construction spending, car sales, productivity

by James Cooper

The headliner in this week’s batch of economic news will be the Labor Dept.’s report on the August job market. Economists expect another moderate drop in payrolls of 70,000 workers, close to the 66,000 average monthly decline from January to July. They also look for the unemployment rate to hold steady at July’s 5.7% reading. Those numbers, if realized, would imply the economy remains weak, but they would not suggest any additional deterioration.

The job markets will be the most important indicator to watch in the second half. So far, consumers have withstood soaring gas prices, falling home values, and tighter credit, partly because overall job losses have been modest compared to previous recession experience. Inflation-adjusted consumer spending in the first half of the year increased at a 1.3% annual rate. That’s weak but not bad given the powerful headwinds.

Job reports for August and coming months will either confirm or deny recent signs that labor markets are getting progressively weaker. The unemployment rate has shot up in recent months, and weekly unemployment claims have also spiked higher. However, economists speculate that some of the rise in the jobless rate was a temporary blip, reflecting the ups and downs in the teenage labor force during the summer. Plus, the bump in jobless claims appears related to the government’s extended benefits program and may overstate the number of newly unemployed.

The week also offers an update on second-quarter productivity, which is expected to be revised significantly higher from the Labor Dept.’s first estimate of 2.2%. The number will reflect the surprisingly large upward revision to second-quarter real GDP, to 3.3% from 1.9%. Businesses have been managing their production thoughout the recent period of weaker demand by reducing hours worked and laying off part timers, while holding on to a greater share of their payrolls than in past downturns. Those efforts, plus strong gains in foreign trade, have helped to boost productivity and hold down unit labor costs.

Manufacturing has benefited substantially from those export-driven gains in foreign trade, but factory job losses have still accounted for more than half of all payroll declines so far this year. This week, the Institute for Supply Management will issue its August report on both manufacturing and nonmanufacturing activity. Through July, the ISM’s index for manufacturing showed factory activity holding up surprisingly well.

Finally, results of the upcoming employment report will be of particular interest to the Federal Reserve, which meets on Sept. 16. Despite the wishes of the inflation hawks on the Fed’s policy committee for an immediate hike in interest rates, history suggests the Fed will not lift rates while the unemployment rate is still rising. Given that the economy is not growing fast enough to generate the job gains required to prevent a further rise in joblessness, the labor markets are likely to remain weak for the rest of the year, which should keep the Fed on the sidelines.

U.S. markets and government offices will be closed for Labor Day on Sept. 1.

Here’s the weekly economic calendar, from Action Economics: