Originally published May 14, 2008
Though headline job losses were smaller than expected in April, the details of the report were weaker than the first impression would encourage. And even though the household survey was stronger than its payroll counterpart, as advertised by the decline in the unemployment rate, a look under its surface also uncovers weakness.
Total employment was off by 20,000, though plus signs were very hard to come by as you scan the sectoral breakdown. Construction fell by 61,000, about evenly divided between residential and nonres; manufacturing shed 46,000, almost all of it in durables. Private services gained 81,000, but many major sectors declined. Wholesale trade was off 11,000; retail, -27,000; information, -2,000. Finance, somewhat mysteriously, gained 3,000. The biggest gains were in health care, up 37,000; bars and restaurants, +18,000; computer systems design, +10,000; and administrative and support services, +13,000. The last sector got no help from its temporary help component, which fell 9,000. Government added 9,000, thanks to an unusually large gain of 4,000 in federal employment. State and local employment was up just 5,000, about a quarter its average over the last year. Budgetary pressures may finally be taking their toll on public employment.
We normally don't question the birth/death model, since it captures startup activity in expansions quite well. But it's often wrong at business cycle turns, and we fear this may be one of those periods. The model added 267,000 to private employment in April, which seems rather generous; without its help, private employment would have been off 296,000. And some of its sectoral contributions in April look even stranger: it added 45,000 to construction and 8,000 to finance. It may be that the gains in our old friend, bars and restaurants, are the model's creation; it added 83,000 to the leisure and hospitality sector. With vacation plans at near-record lows, and restaurants reporting reduced traffic, many of these job gains could disappear in the next benchmark revision. So far this year, the model has added 166,000 to private employment, a time when the reported total is off 312,000. And that includes a large subtraction of 378,000 in January (a month famous for business failures). If we look at just the last three months, the b/d model has added 544,000 to private employment - a time when reported losses were 233,000. And the b/d model's addition to April payrolls is far and away the largest of any month of the year.
Diffusion indexes were a mixed bag, with the one- and twelve-month measures falling, and the three- and six-month ones rising. That suggests to us that the month was worse than it looked, and the trend in the labor market is weakening, though the rate of deterioration has probably stabilized. The shorter-term indexes are below their 1991-92 averages.
The workweek fell 0.1 hour to 33.7, just six minutes above its all-time low. Aggregate hours were off a stiff 0.4% - and an even stiffer -1.2% in goods. Aggregate service hours were up a weak 0.1%. The weakness in hours and in temp employment suggest no great urge to hire in the coming months.
Average hourly earnings were up 0.1% for the month, the smallest gain since October. The yearly gain was just 3.4%, down from 3.7% in March, and 4.1% a year ago. The aggregate number was pulled down by an 0.2% decline in manufacturing, but even service wage gains are easing: up 3.7% year-to-year, down from 4.2% last summer. In other words, wage pressures are clearly easing. As we pointed out in yesterday's report, you can't get a serious inflation going without wage pressures. With commodity prices easing, and signs of stabilization in the dollar, we could be past the peak of the inflation scare. Of course, this does present problems for consumer demand. With hours down, weekly earnings were off 0.2%, and are lagging inflation, but a softening of consumption seems inevitable, given its unsustainable run-up during the expansion.
The household survey looked a lot stronger. Nonag employment was up 462,000 - and on a concept comparable to the payroll survey, up 574,000. It's been outperforming payroll employment for several months now, one of the few bright spots in the employment picture. The unemployment rate fell by 0.1 point to 5.0%, and the employment/population ratio rose 0.1 to 62.7%, reversing March's 0.1 point fall. The educational details were rather poor. For those with less than a high-school diploma, the rate was down 4/10ths; for those with higher levels of education it barely moved.
All that sounds pretty good, but a closer look at the composition of household employment is less reassuring. Almost 3/4 of the gain in nonag household employment came from those working part-time for economic reasons, and another 83% came from what used to be called "willing" part-timers. Yes, that adds to more than 100% - 154% to be precise - because fulltime employment declined by 375,000. The increase in those working part-time for economic reasons was at the 93rd percentile of all months since the series began in 1955; the decline in fulltime employment was at the 90th percentile.
The age composition of household employment gains was rather lopsided. More than half, 57%, of the gains went to teenagers, and another 29% to those aged 20-24. So-called prime-age workers, aged 25-54, accounted for just 4% of the gain.
So, given all its internal blemishes, it would be wrong to conclude that the economy and the job market are stabilizing from the April employment report. Certainly the sour - and worsening - public mood detected by pollsters suggests a troubled economy. An economy providing lots of part-time jobs to the young, and few fulltime jobs to the prime-aged, is one that could have a hard time sustaining life. As we've been saying for some months, it's looking like the job market is eroding, but not collapsing - appropriate, given the slow pace of hiring during the expansion. While erosion is probably better than outright collapse, it could go on for longer than many people expect.
- Philippa Dunne & Doug Henwood