Another Weak US Employment Report

Another month has brought another subpar employment report. Overall, June's employment gain of 80,000 was roughly the same as May's revised 77,000. The big losses in construction and government employment in May were not repeated. But private service job gains were a disappointment in June, especially in education and healthcare. The unemployment rate was steady at 8.2%.

How bad was the report? If the economy were tipping into recession, you would not expect to see the workweek edging higher, temporary jobs rising slightly faster, and hourly earnings rising more quickly—all of which happened in June. So the report is still consistent with growth, albeit slow. But firms are being very careful about adding new full-time employees. Uncertainties over the strength of global growth, the Eurozone crisis, the “fiscal cliff,” and the November elections are giving plenty of reasons for caution.

In the payroll details, manufacturing added 11,000 jobs, more than all of them in durables. Most of the jobs (7,000) were in motor vehicles and parts, which remains one of the bright spots in the economy. Overall manufacturing production-worker hours rose 0.2%, a good sign for manufacturing output growth in June. The manufacturing workweek and overtime both rose.

Construction added 2,000 jobs, after losing 35,000 jobs in May, when the "warm winter" effect probably fully unwound. There were small increases in both residential and nonresidential construction.

Private services employment growth was 71,000, down from 126,000 in May. The temporary bounce in transport and warehousing was not repeated (up 32,000 in May, down 2,000 in June), but that was no surprise. The disappointment came in education services (down 10,000) and healthcare services (up 13,000), both well below their norms. The retail sector shed 5,000 jobs, more than all of them in department stores.

Professional and business services did much better than in May (up 47,000, instead of up 24,000) as professional and technical jobs rose 18,000, instead of 7,000. And temporary help jobs rose 25,000, better than May's 19,000 gain (which itself was revised up from 9,000). Leisure and hospitality added 13,000 jobs, after two months of decline. As in construction, the "mild winter payback" probably ended in May.

The government sector shed only 4,000 jobs, but that followed a steep 28,000 loss in May (originally reported as just 13,000). Federal employment dropped 7,000. State and local government employment rose by 3,000, with state employment down 1,000, but local government employment up 4,000. We doubt, though, that state and local job losses are at an end.

The private workweek reversed May's decline, lengthening to 34.5 hours, from 34.4. A longer workweek combined with the small increase in private employment to generate a 0.4% increase in hours worked, the strongest month since February. But for the second quarter overall, hours were up only 0.4%, after a 4.3% increase in the first quarter.

Average hourly earnings were up a relatively strong 0.3% month on month and 2.0% year on year (y/y) and, thanks to falling gasoline prices, wage increases are now outpacing CPI inflation (which was 1.7% y/y in May). Overall payrolls (wages multiplied by hours) had a strong month, rising 0.7%, good news for household income growth, and therefore for consumer spending power.

The steady unemployment rate at 8.2% reflected a 128,000 increase in household employment roughly matched by a 156,000 increase in the labor force. The labor-force participation rate (the proportion of the adult population in the labor force) was steady at 63.8%. 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 14.9%, from 14.8%. The picture remains very bleak for the long-term unemployed. The proportion of long-term unemployed (27 weeks or longer) did edge slightly lower, but was still at 41.9%. 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.

Second-quarter employment growth averaged just 75,000, after gains averaging 226,000 in the first quarter. We still think that second-quarter employment growth reflects some undershooting after the overshooting in the first quarter, though clearly the deceleration has reflected more than just weather fluctuations. We are expecting job creation of 100,000–150,000 per month in the second half of the year.

Another weak employment report increases the pressure on the Fed to try something more dramatic than the extension of Operation Twist that it announced in June. Another round of bond purchases (i.e., QE III) is the obvious option—but we are not convinced that the Fed will be ready to jump at its next meeting on August 1. We continue to expect QE III to be introduced after the Twist expires at the end of the year.

by Nigel Gault