Markets & Finance

The Job Market's Freeze Deepens in February


Action Economics expects nonfarm payrolls losses of 650,000 in the Mar. 5 release of the February U.S. employment report

Action Economics expects the U.S. employment report for February, scheduled for release Friday, Mar. 6, to extend the massive job hemorrhaging that has taken place over the prior three months. We expect the February U.S. nonfarm payrolls drop to outpace the jumbo 577,000-598,000 declines seen in each of the last three months, given the further deterioration under way in initial jobless claims, consumer confidence, and manufacturing sentiment. We expect a 650,000 February payroll plunge —featuring a big 200,000 factory-sector decline—alongside a jump in the jobless rate to 8% from 7.6%. Friday's payroll drop runs the risk of outpacing the record 834,000 decline seen in October 1949.

Looking at the other components of the report, the average workweek is expected to hold at 33.3 hours (in line with economists' median forecast of 33.3), while average hourly earnings are expected to increase 0.2% (median 0.2%). We expect jobs in the goods sector to post a hefty 315,000 drop in February, alongside a 350,000 drop for the private service sector, and a 15,000 rise for government employment.

Here is a look at the economic data reports that have informed Action Economics' forecasts:

Jobless Claims Keep Climbing

The ADP Employment private payroll survey scheduled for release Mar. 4 should reveal a 665,000 February decline that would be consistent with our estimated -650,000 nonfarm payrolls figure, given an assumed 15,000 February rise in government payrolls. The component breakdown should reveal a 315,000 drop for goods employment with a big 200,000 drop for factories, alongside a 350,000 drop for the much larger service sector. We might see a slightly smaller drop in the February ADP survey than implied by our payroll estimate given the dependence of the ADP figure on prior recent payroll declines, which might not fully capture the accelerating downturn we assume is under way.

The weekly initial and continuing jobless claims figures have continued to climb rapidly. In the third week of February, initial claims hit the highest level since October 1982, while continuing claims reached an all-time high of 5,112,000 in the Bureau of Labor Statistics' February survey week, when data for the month's employment report are gathered.

Indeed, continuing claims since mid-January have consistently exceeded the 4,713,000 prior all-time high set back in November 1982, when the jobless rate peaked at 10.8%. Of course, the labor force is trending upward, so we should expect the continuing claims figures to generally set higher highs with each cycle. Yet the steep climb in the insured unemployment rate to 3.8% in the most recent week leaves this measure at its highest rate since July 1983—when the overall jobless rate sat at 9.4%.

The consumer confidence surveys have yet to establish a bottom. The February Michigan Consumer Sentiment index fell to 56.3 from 61.2 in January, which leaves the index just short of November's reading of 55.3—the lowest reading since June 1980. The Conference Board's February consumer confidence index dropped to an all-time low of 25 from 37.4. In aggregate, sentiment readings in February have further deteriorated despite hope that the rebound we saw around the turn of the year implied that sentiment was stabilizing. Overall, confidence readings in February show how focused the public is on the "crisis environment" in this cycle, and that confidence remains deep in recession territory.

The Institute for Supply Management's manufacturing index for February revealed a welcome uptick in the headline to 35.8 from 35.6, though this measure still remains quite lean. And the employment component fell to an all-time low of 26.1, signaling substantial downside risk for Friday's factory figures for payrolls and hours worked.

The February headlines for the Empire State and the Philadelphia Fed surveys were less encouraging than the ISM headline, with a round of new lows for the cycle. In addition, the employment components for the Empire State, Philadelphia Fed, and Chicago purchasing managers' indexes all revealed big declines on the month to new cyclical lows. The data suggest that the factory sector is deteriorating at an accelerating clip.

Services Look Weak, Too

The release of the ISM nonmanufacturing report on Mar. 4 should reveal weakness in the service sector as well. We expect a February headline drop to 40 from 42.9 alongside weakness in the associated employment measure that is in keeping with our -350,000 private service sector payroll forecast for the month.

In total, we expect the pace of job less to continue to accelerate through February, with the largest pace of job lose for the cycle thus far. Many economists now expect a first-quarter gross domestic product decline comparable to the 6.2% rate of decline now reported for the fourth quarter, with risk that this rapid pace of decline may extend into the second quarter. Success for the government's stimulus plan in February should presumably hinge on an associated surge in consumer confidence and business sentiment. This should more than offset the adverse effects of rising yields and prices in anticipation of future borrowing and tax increases—as would be predicted by most "post-Keynesian" models of economic activity.

It would appear, however, that the effect has been just the opposite, as consumers and businesses are now pulling back even more aggressively in the face of what seems to be an accelerating crisis.

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

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