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11/09/2012 | US - Perspectives: Disappointing US Jobs Report Paves the Way for Fed Easing

Nigel Gault

August payroll employment growth was weaker than expected, at 96,000. A drop in the unemployment rate reflected lower labor-force participation, not rising employment. The report "seals the deal" for more easing from the Fed on September 13.

 

July's jobs report had hinted at an acceleration in the labor market after a weak second quarter. The August report has dashed those hopes. Job growth was anemic, at 96,000, and June and July were revised down a combined 41,000. Even the drop in the unemployment rate to 8.1% from 8.3% was bad news because it happened for the "wrong" reason—a declining labor force rather than rising employment. This disappointing report shows no pickup in the economy's sluggish pace of growth. It "seals the deal" for more easing from the Federal Reserve on September 13.

In the payroll details, manufacturing lost 15,000 jobs, after adding 23,000 in July. The big swing was in motor vehicles and parts, where there were fewer summer shutdowns than normal in July. That meant there were fewer workers to bring back in August than normal—which translated into a seasonally adjusted jobs decline. A similar seasonal quirk might have been operating in other durables industries. But if we look beyond these blips, we can see that manufacturing job growth has slowed, to an average of 5,000 per month over the past three months, compared with 21,000 per month in the previous three months. That slowdown makes sense given the reports of declining manufacturing orders from the ISM survey and from durable goods reports.

Overall manufacturing production-worker hours fell 0.4%, a bad sign for manufacturing output growth in August. The manufacturing workweek and overtime both fell.

Construction employment was almost flat, rising just 1,000. Residential construction jobs were up 7,000, reflecting an improving trend in housing starts, but nonresidential jobs fell 9,000. Heavy and civil engineering added 3,000 jobs.

Private services employment growth was 119,000, down from 139,000 in July. Jobs were added at the top and bottom of the pay scale, with professional and technical services up 27,000, and food services and drinking places up 28,000. Sharply rising gasoline prices do not seem to have hurt eating or drinking out. Healthcare added 17,000 jobs, fewer than its "normal" pace. Temporary help jobs fell 5,000, and their gains in June and July were revised down. That's a discouraging sign, because if employers are becoming even more cautious, temp hiring would be one of the first areas affected.

The government sector shed 7,000 jobs, less severe than the 21,000 loss in July. Federal hiring actually rose 3,000 (although it fell a sharp 12,000 in July), while state and local employment dropped another 10,000, much the same as July's 9,000 decline.

The private workweek held steady at 34.4 hours, but that was from a downwardly revised July level. Total hours worked edged up 0.1%, on the employment gain, but July hours were revised to show a 0.2% decline rather than the 0.1% increase originally reported. That means that total hours are now on track for a weak increase of only around 0.5% for the third quarter, little different from the 0.4% increase in the second quarter, which gives no reason to expect GDP growth to accelerate from the second quarter's 1.7% pace.

Average hourly earnings were flat month on month (m/m) and up 1.7% year on year (y/y). That's slightly better than the July CPI inflation rate of 1.4%, but unfortunately the CPI inflation rate is about to jump up sharply given the rise in gasoline prices during August. Overall payrolls (wages multiplied by hours) were flat for the second month in a row, discouraging news for household income growth.

The unemployment rate, which comes from a different survey than the payroll figures, dropped from 8.3% to 8.1%. This was not welcome news, though, because it reflected a big 368,000 drop in the labor force that outweighed a 119,000 drop in household employment. The labor-force participation rate (the proportion of the adult population in the labor force) dropped from 63.7% to 63.5%, hitting its lowest level since September 1981.

The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—also dropped, from 15.0% to 14.7%. The proportion of long-term unemployed (27 weeks or longer) dropped to 40.0%, from 40.7%. This is the third monthly decline in a row for the long-term unemployed ratio, but it may not be good news—it could just mean that those out of work the longest are the ones leaving the labor force. The longer that potential workers remain unemployed, the less likely that they will ever get back into employment.

Uncertainties over the strength of global growth, the Eurozone crisis, the fiscal cliff, and the November elections are giving employers plenty of reasons for caution. We expect subdued monthly job creation in the 100,000–150,000 region over the rest of the year, in an economy growing at only around 1.5%. This picture will greatly trouble the Federal Reserve. Fed chairman Bernanke identified the labor market as a "grave concern" in his recent Jackson Hole remarks, so the weak August report should ensure more easing from the Fed on September 13. We expect the Fed to extend its "low-rates" guidance through mid-2015, and to launch a QE3 program of quantitative easing (concentrated on purchases of mortgage-backed securities) worth $500–600 billion. We do not think these measures will be very effective in boosting growth, but for the Fed it is a question of trying to do what it can.

Global Insight (Reino Unido)

 


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