Economic Focus -- From Action Economics

Jobs Picture: Improving, but Still Ugly


The hefty labor market collapse of the 2008 fourth quarter and 2009 first quarter makes the emerging second-quarter declines look comforting in comparison. We expect the Labor Dept.'s U.S. employment report for May, scheduled for release on June 5, to show a drop of 500,000 in nonfarm payrolls—the best reading for payrolls since October.

Of course, "best" is relative, as the May figures should still reflect a sizable pace of labor market deterioration. The projected decline would still sharply exceed the 325,000 payroll drop in September 2001, which marked the worst reading of the 2001 recession amid the immediate impact of the September 11 terrorist attacks.

In addition, the jobless rate is expected to rise to 9.2% in May from 8.9% in April, which would mark the highest unemployment rate since September 1983. We expect the rate to reach 10% by August and 10.4% by yearend, with risk of challenging the 10.8% post-World War II high from November 1982.

The average workweek is expected to hold at 33.2 hours, while average hourly earnings are expected to increase 0.2%.

A Spike in Census Jobs

Since September, we have seen a broad contraction in the level of payrolls across all major industries except Education & Health, which has posted average monthly job growth of 27,000 per month over the period. The one notable exception in April was Government, where federal government employment swelled by 66,000, mainly because of hiring temporary workers in preparation for Census 2010.

Overall, the risk is for an industry breakdown similar to April. Education & Health and Government should post gains, while most other industries should show continuing attrition, even if the pace of job losses appears to be diminishing.

Here is a look at some of the data that factored into our forecast:

The ADP Employment payroll survey for May, released June 3, revealed a 532,000 May drop in private payrolls. The figure would correspond to a -452,000 nonfarm payroll figure if we assume an 80,000 government payroll rise due to Census hiring. The ADP industry breakdown for May revealed an as-expected mix of a 267,000 drop for jobs in goods producers with a 149,000 decline at factories, and a 265,000 drop for services.

The ADP figures, broken down by company size, continue to show a skewing of job loss toward small and midsize firms vs. large firms.

Weekly initial jobless claims fell to 623,000 for the week ended May 23 and are averaging 631,000 thus far in May, similar to April. Despite a recent boost from restructuring in the auto sector, the figures remain well below the 27-year high of 674,000 hit during the week ended Mar. 28, and below the 657,000 March average as well. Current claims figures are more in line with the 637,000 average in February, though well above the 572,000 January average, and certainly above the sub-400,000 figures as recently as June.

Uptick in Confidence

Continuing claims are continuing to set new all-time highs by the week, as these figures historically continue to climb until job growth returns to the underlying growth pace for the labor force.

The consumer confidence surveys revealed an ongoing rebound in May. The May University of Michigan's Consumer Sentiment Survey surged to 67.9 from 65.1 in April, while the Conference Board's Consumer Confidence Survey jumped to 54.9 from 40.8 in April. Consumer confidence is still at historically depressed levels, but the notable improvement over the last few months suggests a diminishing payroll downdraft.

The various factory sentiment reports have also risen through April and May, though with a notable headline drop in the May Chicago PMI report that bucked the trend.

May gains were seen in the employment components of the Empire State and Philadelphia Fed reports, though not the Chicago report, where we saw a big drop. The employment component of the May Institute for Supply Management (ISM) manufacturing report posted a small downtick, to 34.3 from 34.4 in April that split the difference between the employment measures of the other surveys.

Leveling Off?

The employment component of the May ISM nonmanufacturing report rose to 39.0, following the April jump to 37.0 from a recent low of 32.3 in March, and a prior cycle-low of 31.1 in November.

In total, the monthly payroll figures are poised in the months ahead to reveal a diminishing pace of decline relative to the steep drop seen in the 2008 fourth quarter and 2009 first quarter. But while diminishing weakness is good news, labor market fundamentals remain weak relative to prior recessions. The jobless rate should continue to rise through yearend, as payrolls continue to fall short of the typical 100,000-120,000 monthly labor force gain.

MacDonald is director of investment research and analysis for Action Economics.


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