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07/10/2006 | Conflicting Signals in September's U.S. Employment Report

Global Insight Staff

The September employment report showed a payroll gain of only 51,000. But the August gain was revised up, the unemployment rate fell, and new benchmark data indicate that the payroll survey has been understating employment growth. The economy is slowing, but not enough to prompt a Fed rate cut before next March.

 

This is a tricky employment report to interpret. Let's take the bad news first. The headline payroll employment increase was only 51,000, the weakest month since hurricane-affected October 2005. Manufacturing employment fell 19,000, for its third monthly decline in succession. Construction employment edged up 8,000; big losses in residential trades were offset by gains in nonresidential trades. And the service sector had a lousy month. Retail employment fell yet again (down 12,000), while employment in professional and business services rose only 12,000 (compared with a 35,000 average over the past 12 months).

Total hours worked fell 0.1% in September, the second monthly decline in a row. And the increase in hours worked for the third quarter overall was just 0.9% (down from 2.6% in the second). That is the weakest increase in three years, and is consistent with the notion that real GDP growth slowed in the third quarter (Global Insight expects growth of 1.7%, down from 2.6% in the second quarter). The news was especially bleak in manufacturing, where overtime fell and hours worked dropped 0.7%, suggesting that industrial production fell in September.

Even within the payroll survey, the news was not all bleak, because employment growth for August was revised up by 60,000, from 128,000 to 188,000. Averaging the two months together gives an increase of 120,000—not much different from the six-month average of 118,000.

And the household survey contained good news. The unemployment rate fell to 4.6%, from 4.7%, as household employment growth of 271,000 outpaced labor-force growth of 101,000.

The household survey gained added credibility after today's report, as the Bureau of Labor Statistics announced that it expects its next benchmark revision to raise the level of payroll employment by 810,000 as of March 2006. Significantly, this revision will remove most of a big gap that had emerged between the household and payroll surveys. From March 2005 to March 2006, the household survey shows 3.0 million jobs created, while the unrevised payroll survey shows just 2.0 million jobs created.

The payroll employment count comes from a survey of employers. The household employment count (and the unemployment rate) come from a survey of households. There is a danger that the payroll employment survey can undercount jobs by failing to adequately allow for job creation in new companies. Every year, the payroll employment count is "re-benchmarked" to a calculation of total employment based on state unemployment insurance tax reports. In recent years, revisions have averaged a modest plus or minus 0.2% of employment—but for March 2006, the preliminary estimate of the revision is 0.6%, representing 810,000 jobs. In effect, this means that payroll employment growth between March 2005 and March 2006 has been understated by a whopping 67,500 per month.

One could argue that the revision is purely of historical interest—what matters is what is happening now. But since the household survey has continued to paint a more upbeat picture of the labor market than the payroll survey since March, it is possible that the payroll survey remains too gloomy.

Average hourly earnings rose 0.2% over the month and 4.0% year-on-year. The monthly increase is modest enough not to raise red flags on inflation, but it is still good news for pay packets. Until recently, 4% growth in earnings would have been sufficient only to keep pace with consumer price inflation, but given recent declines in gasoline prices, consumer price inflation will be falling sharply. With inflation likely to be around 2% year-on-year as of September, workers will now begin to see their pay packets running ahead of inflation, boosting their spending power. This extra spending power should help boost fourth-quarter GDP growth to 2.6%.

With data pointing in conflicting directions, and with the credibility of the payroll survey figures dented by the large benchmark revision, drawing conclusions from today's report is tricky. The data are consistent with an economy that is slowing, although not yet slowing enough to raise the unemployment rate (which tends to be a lagging indicator). Underlying employment growth is probably doing better than the 51,000 headline payroll increase suggests. The implication for the Federal Reserve is that "wait and see" remains the correct policy prescription, and that there is no need to rush in with an interest rate cut while inflation concerns remain. We do expect the Fed to start cutting interest rates in 2007, beginning at the end of March, but a rate cut as soon as this December or January 2007 is unlikely.

Contact

Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

http://www.globalinsight.com/ and http://www.wmrc.com/

Global Insight (Reino Unido)

 



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