U.S. Unemployment Rate Breaches 10%

The payroll survey loss of 190,000 jobs was worse than generally expected (although in line with our expectation), but there were a few glimmers of hope in the payroll report, which showed 91,000 fewer jobs lost than previously thought in August and September. A couple of key "leading indicators" improved, as employers added 34,000 temporary jobs (usually the first jobs to come back), and manufacturing overtime rose.

Private employment fell 190,000 in October, a bit faster than in August and September, but it would be wrong to conclude that the trend has shifted. The three-month moving average decline is still easing (it is now 178,000). The job losses were concentrated in manufacturing, construction, retail trade, and leisure/hospitality.

Manufacturing jobs fell 61,000, the biggest decline since June. All major sectors were flat or down, with the exception of motor vehicles and parts, which rose slightly. This is a disappointing result, in the light of the signal from the ISM manufacturing survey, whose employment index broke above the break-even 50-mark for the first time in more than a year. There was an increase in the manufacturing workweek (to 40.0 hours, from 39.9) and in manufacturing overtime (to 3.2 hours, from 3.0), which signaled that at least some employers need to raise hours worked in order to ramp up production. And it is likely that some of the increase in temporary help employment (which is classified in the service sector) reflected workers being deployed in manufacturing. But even if all of the temporary help was allocated to manufacturing, that would not wipe out the drop in manufacturing employment. Overall manufacturing hours worked fell 0.4%, signaling that sharp production increases are still being achieved by raising productivity, not hours worked.

Construction payrolls fell by 62,000, very similar to the declines in previous months. The contrast between the residential and nonresidential sectors remains stark. The losses in the residential sector were 15,000 this month, but the nonresidential sector lost 33,000 jobs. This is consistent with the story that residential construction activity is bottoming out, but that nonresidential has much further to fall. There were 14,000 jobs lost in heavy and civil engineering construction, where one might hope to see the impact from fiscal stimulus coming through—but one cannot know how many jobs would have been lost without the stimulus.

In the private services sector, job losses eased to 61,000 in October, from 65,000 in September. Retail job losses were severe again, at 40,000, as employers remain very cautious in the face of a low on consumer confidence and without support from income growth. Transportation and warehousing continued to shed jobs (down 18,000) and financial services lost 8,000, but utilities (flat), and information (down 1,000) were little changed. There was also a sharp job loss in the leisure and hospitality sector (down 37,000). This is probably a one-month correction, though, since it was driven by an 18,000 drop in amusements and gambling that reversed an odd 15,000 surge in September.

Some parts of services showed job growth. Healthcare added 29,000 jobs and education added 11,000, in addition to the 34,000 in temporary help.

State and local governments shed jobs again, losing 16,000 this month, as budget cuts continued to bite. In contrast to September, the entire decline came outside the education sector. The federal government added 16,000 jobs, though, perhaps stimulus related.

The unemployment rate rose to 10.2%, from 9.8%, as the household survey showed a huge decline in employment (down 589,000) and little change in the labor force (down 31,000). Note that the household survey is smaller than the payroll survey, so its employment numbers are more volatile from month to 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 from 17.0% to 17.5%.

The increase in the manufacturing workweek was not sufficient to move the overall workweek up, and total hours worked fell yet again. Total hours worked in the private sector fell 0.2% last month, after a 0.5% decline in September. Average hourly earnings growth did pick up slightly, though, from 0.1% to 0.3%. That should leave total wage and salary incomes little changed in October.

The decline in hours implies that the fourth quarter (when we expect to see 2.7% GDP growth) will see another strong increase in productivity (although not approaching the 9.5% gain in the third quarter).

We expect that job declines will continue to ease, since we expect that productivity gains will slow, and that firms will find they must bring in new workers to keep output growing. The extra boost provided by the hiring of Census workers should probably be enough to turn total employment growth positive by March. But we do not see employment increasing strongly enough to make much of a dent in the unemployment rate. Before today's report, we had expected the unemployment rate to peak at 10.2% and to average 10.0% in 2010. Now that we have already hit 10.2%, we must anticipate a peak of 10.4–10.5% and an average next year of more than 10.0%.