Obviously, the small rise in the payrolls figure was a disappointment. But the biggest surprise was the 0.2 hour drop in the average workweek, to 33.6 hours. This was well below the consensus forecast of 33.8, and left the workweek back at its all-time low. This figure tends to be underappreciated relative to the change in payrolls, but each 0.1 hour drop is the hours-worked equivalent of about 400,000 workers. As such, the June workweek drop was the equivalent of about an 800,000 drop in payrolls, which was softened by the 112,000 gain in actual payrolls.
The particularly surprising weakness in the workweek data can probably be attributed to Ronald Reagan's funeral, which was held on the Friday of the survey week. This weakness could have affected the wage data as well, though we might normally have expected a boost. The payroll data were likely not affected, however, so this explanation is only a partial consideration in analyzing the data.
WIDESPREAD WEAKNESS. The Federal Reserve keeps a keen eye on the jobs data, of course, and with the unexpected weakness in the June report, it may be in less of a hurry to hike interest rates. This will certainly allow Alan Greenspan & Co. to adopt a less aggressive stance at the August policy meeting, where we at Action Economics still expect a boost in the Fed funds target rate of one-quarter percent.
Looking at the rest of the data in the establishment portion of the survey, weakness was widespread. Hourly earnings posted a small 0.1% gain in June, also removing the momentum of prior monthly increases. The year-over-year wage-growth figure fell from 2.4% in May to only 1.7% in June, hence leaving wage growth in a sideways pattern once again. The employment report releases a real earnings series with a one-month lag. This may account for the recent moderation in growth. The spike in inflation in May left real earnings dropping a hefty 0.5% on the month.
June also marks the fourth out of the last six months that real earnings have fallen. This leaves real hourly earnings declining at a 0.9% rate over the year, which marks the worst year-over-year decline since July, 1991 -- during the previous recession.
PAST THE PEAK? Job growth in June was at a notably slower pace than what occurred in March, April, and May. The biggest surprise was the 11,000 drop in manufacturing employment, despite signals from another key labor-market indicator -- the Institute for Supply Management's employment gauge in its factory-sector survey -- suggesting factory payroll growth of over 50,000. Construction employment was unchanged following the robust strength in March through May. Overall, the data support the view that the peak in job growth for the year likely occurred in this March-May period.
The data suggest downside risk for other related reports for the month, with a likely 0.1% June industrial production gain and only a flat June personal income figure. This will restrain consumption spending in the third quarter following an estimated 2% growth pace in the second. Industrial production still likely posted a solid 7.6% growth rate in the second quarter, but growth here should drop back to 6% in each of 2004's final two quarters.
Employee-hours posted a 2% growth rate in the second quarter, which comfortably supports our GDP outlook, with "only" a 3% productivity gain for the quarter. We at Action Economics still project a 4.2% GDP gain in the second quarter, but our third- and fourth-quarter forecasts have both been lowered to 4.8%.
(For Economy.com Chief Economist Mark Zandi's take on the June jobs report, see "If You're Unemployed, You're Stuck.") Englund is chief economist and MacDonald is director of investment research and analysis for Action Economics