US Employment Growth Disappoints in May

The Bureau of Labor Statistics reported that employment grew just 69,000 in May, far below expectations. A downward revision to April means that job creation has been below 100,000 for two months in a row. This year is beginning to look horribly like 2011—when initial hopes that the recovery was kicking into high gear were subsequently dashed. The sharp warm-weather-inflated job gains at the turn of the year have not been sustained. Job gains in the three months to February averaged 252,000. In the three months to May, they averaged 96,000.

The 422,000 jobs added in the household survey looks like good news, like the return of 642,000 to the labor force—even though that did drive the unemployment rate up to 8.2%, from 8.1%. But the household survey is volatile. Over the last three months, the average employment gain in the household survey was just 74,000, worse than the payroll survey.

In the payroll details, manufacturing added 12,000 jobs, all of them in durables. Half of the jobs were in motor vehicles and parts, which remains one of the bright spots in the economy, with vehicle sales continuing to run strong. But overall manufacturing production-worker hours fell 0.4%, a bad sign for manufacturing output growth in May. The manufacturing workweek shrank, as did overtime.

Construction was a big negative, losing 28,000 jobs. The "warm winter" boost has probably fully unwound now. There were losses in all sectors: residential (down 11,000), nonresidential (down 6,000), and heavy and civil engineering (down 11,000).

Private services employment growth was 97,000, up from 83,000 in April (which had previously been reported as up 116,000). The improvement was wholly in transport and warehousing (up 36,000 instead of down 17,000). Unfortunately, this probably does not reflect any underlying improvement. In April, a 14,000 drop in ground transit employment probably reflected the timing of school holidays (affecting school bus drivers). This drop was more than reversed in May (up 20,000), but that is just a temporary bounce.

The other service sector showing improvement in May was education and health, up 46,000 instead of up 29,000. Elsewhere, the news was bleak. Business services lost 1,000 jobs (instead of adding 37,000), with professional and technical services down 4,000 (instead of up 19,000). Temporary jobs rose 9,000 (instead of rising 13,000). Leisure and hospitality lost 9,000 jobs, the second successive monthly decline after a string of sharp increases. Like construction, this sector may have previously benefited from the mild winter weather. Retail added only 2,000 jobs, but a slowdown here was not a surprise after it added 27,000 jobs in April.

The government sector shed 13,000 jobs. Federal employment dropped 5,000. State and local government employment fell by 8,000, down 5,000 in state government and down 3,000 in local government. State and local job losses have slowed—but they have not stopped yet.

The private workweek shortened to 34.4 hours from 34.5 hours. A shorter workweek combined with only a small increase in private employment generated a 0.2% drop in total hours worked. Hours worked surged 3.8% in the first quarter, the strongest quarter yet in the recovery, but the second quarter now appears on track for virtually no change in hours. That suggests downside risks to our expectation of 2.0% GDP growth for the second quarter—but productivity probably rose in the second quarter after falling in the first.

Average hourly earnings were up only 0.1% month on month and up just 1.7% year on year (y/y)—still well below the CPI inflation rate, which is at present 2.3% y/y. Weak wage inflation suggests that there is still plenty of slack in the labor market. Overall payrolls (wages multiplied by hours) fell 0.1%, which is bad news for household income growth, and therefore for consumer spending prospects. It suggests that private wages and salaries may have fallen in May.

The increase in the unemployment rate from 8.1% to 8.2% reflected a 422,000 increase in household employment combined with an even bigger 642,000 increase in the labor force. The labor-force participation rate (the proportion of the adult population in the labor force) rose to 63.8%, from 63.6% in April (which was a new low for the cycle). Optimists could argue that since the household survey is more likely to pick up those employed in new businesses than the payroll survey, perhaps the 69,000 payroll employment growth gives an overly pessimistic view. But since household employment is based on a much smaller sample, it is far more volatile than payroll employment. Over the last three months, household employment is up just 74,000 per month on average, which is worse than payroll employment (up 96,000 per month).

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—rose to 14.8%, from 14.5%. The picture remains very bleak for the long-term unemployed. The proportion of long-term unemployed (27 weeks or longer) rose to 42.8%, from 41.3%. The longer that potential workers remain either unemployed or on the sidelines outside the labor force entirely, the less likely that they will ever get back into employment.

The rapid 250,000-plus job gains in the three months to February were inconsistent with the modest pace of recovery in overall output—GDP was up only 1.9% in the first quarter. It now appears even clearer that jobs have decelerated into line with GDP, rather than GDP accelerating to catch up with jobs. Although there is probably now some undershooting in seasonally sensitive sectors (for example in construction), the latest figures cast doubt on whether the economy has enough momentum to achieve even the 2.2% growth rate we had expected for this year. Given the uncertainties over the Eurozone crisis, emerging market growth, the US elections, and the "fiscal cliff," there are plenty of reasons for businesses to stay cautious in their hiring plans, even if surging gasoline prices are for the moment off the list of things to worry about.

There is clearly less momentum than Fed participants had anticipated. Consequently, we expect that the Fed will probably try to keep pumping in stimulus in some form in the second half of the year. For now, though, the markets are doing the job of driving down long-term rates without any extra help from the Fed.

by Nigel Gault