U.S. Employment Much Worse Than Expected in June

The main shift was that employment in private services fell more steeply in June than in May, possibly reflecting less summer help being taken on than normal. Construction employment also fell faster than in May. And the federal government lost almost 50,000 jobs as temporary Census workers left the payroll. Manufacturing employment fell less steeply than in recent months, although it still showed a triple-digit decline. Two "leading indicators"—temporary employment and the length of the workweek—both did worse than in May.

The main piece of good news in the report was that the unemployment rate only rose by one-tenth of a percentage point. But the damaging effect of rising unemployment on wages was evident in hourly earnings, which were flat on the month. With high and rising unemployment keeping wage increases near zero, fears of inflation based on "excessive" monetary and fiscal stimuli are premature.

In the payroll details, manufacturing cut 136,000 jobs in June, compared with 156,000 in May. Auto industry employment showed another sharp decline (down 27,000). There were continued job losses in most other durable goods manufacturing categories, notably computers and electronics (down 16,000), fabricated metals (down 18,000), and machinery (down 14,000), but not as severe as in recent months. No major manufacturing sectors added jobs. The manufacturing workweek edged slightly higher. Total manufacturing hours worked fell 1.2%, less steeply than in May (down 1.9%), but still signaling that manufacturing output has yet to hit bottom, and that the inventory adjustment is not yet complete. But we believe that the inventory cycle will begin to turn in the third quarter, and that manufacturing output will begin to rise, led by automobiles.

Construction jobs fell by 79,000, more than in May (down 48,000), but these are still the first back-to-back declines of less than 100,000 per month since October 2008. Job losses in residential construction (down 31,000) and nonresidential construction (down 32,000) were evenly balanced. And there were 16,000 jobs lost in heavy and civil engineering construction, suggesting that fiscal stimulus has not yet had a big impact.

The private service sector lost 192,000 jobs, compared with 97,000 in May, although this still represents a much better performance than in the six months from November to April, each of which lost more than 300,000 private service jobs. The biggest swings in June compared with May were in temporary help (down 38,000, instead of down 8,000) and leisure and hospitality (down 18,000, instead of up 18,000). This may reflect less hiring than normal in seasonal industries like tourism.

High-end professional and technical jobs fell 40,000, a sharper drop than May's 23,000 decline, and education and health added fewer jobs than in May (34,000, compared with 47,000).

The other major private service categories showed little change in job losses between May and June, including retail trade (down 21,000, instead of down 18,000), wholesale trade (down 16,000, instead of down 18,000), transportation and warehousing (down 14,000, instead of down 20,000), and the financial sector (down 27,000, instead of down 30,000).

Government employment fell by 52,000, after a 10,000 decline in May. Excluding the U.S. Postal Service, the federal government shed 46,000 workers in June, the bulk of which had been hired in March and April to do temporary preparatory work on the 2010 Census. State and local government employment fell by 3,000 and was essentially flat over the first six months of the year. Given the well-publicized budget problems at the state and local level, we expect to see their payrolls declining in the second half of the year, as their new fiscal year begins and budget cuts kick in.

Overall hours worked fell by 0.8% in June, a steeper decline than in May. For the second quarter overall, hours worked fell at a 7.9% annualized rate. It is interesting that this is only slightly less severe than the first-quarter decline (down 8.9%) and more severe than the fourth-quarter decline (down 7.4%). Yet the incoming evidence on spending points to a much shallower GDP decline in the second quarter (we think a 2.1% drop) than in the previous two quarters (a 5.5% drop in the first quarter and a 6.3% drop in the fourth quarter). The implication is that productivity grew very rapidly in the second quarter. This suggests that if output really is beginning to stabilize (as we believe), firms are unlikely to be able to sustain such rapid productivity growth from their remaining staff, and will have to slow the pace of job losses substantially in the second half of the year.

The headline unemployment rate rose to 9.5%, from 9.4%. The household survey, which determines the jobless rate, showed employment down 374,000 and the labor force down 155,000, so unemployment rose by 218,000. The most comprehensive measure of underemployment—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 edged up by 0.1 percentage point, from 16.4% to 16.5%.

The unemployment rate for teenagers rose from 22.7% to 24.0%, signaling difficulty in finding summer jobs. The rate for adult males hit 10.0%—for the first time since June 1983. The rate for adult females has also risen in this recession, but less severely, to 8.3%. Heavy job losses in the male-dominated manufacturing and construction sectors have driven the disparity.

The report gave a cautionary warning about consumer incomes, as hourly earnings were flat. This, combined with the still-heavy loss of jobs, signals a continuing decline in overall wage and salary incomes, which is bad news for household purchasing power.

Although we expect the economy to bottom out in GDP terms during the second half of the year, job losses should continue throughout 2009, with the unemployment rate peaking at 10.3% in the first half of 2010. Total job losses now stand at 6.5 million, and we probably have another 1 million to go. But the worst news is behind us, and employment declines should progressively soften as the year proceeds.