Goodbye V-Shaped Recovery: Payrolls Surge and Disappoint
One would hope for some better numbers at this stage of the recovery. The U.S. employment report surprised largely on the downside with very strong headline numbers that were mainly the result of temporary Census hiring, and rather weak job gains in the private sector. After surging more than expected last month, the workforce contracted by 332,000 contributing to a 0.2% reduction of the unemployment rate. Unemployment and underemployment remain stubbornly high and we maintain the view that a peak will be reached only in early 2011. Personal consumption was a growth driver in Q1 2010 as we predicted in our most recent Outlook. But over time, consumption will become more aligned with income growth, which remains rather anemic. Substantial slack is still present in labor markets after the economy shed over 8 million jobs during the recession, and this will prevent any wage pressures from rising. We maintain our 3% GDP growth forecasts for 2010—with some downside risks to that forecast—and we stick, more than ever, to our theme of a year of two halves.
The Good News
- The average workweek and temporary employment are leading indicators for the labor market since firms increase work hours, hire temporary workers and move workers from part-time to full-time before hiring new full-time workers. The economy has been adding temporary workers since October 2009, and temporary employment has risen by 126,000 so far in 2010. After bottoming out in October 2009, the average workweek has picked up slightly, reaching 34.2 hours in April. The workweek in the manufacturing sector has been improving as well reaching 40.5 hours in May (40.1 in April), which is a positive factor for industrial production. These are positives for labor income.
- The increase in employment (albeit very disappointing on the private side) and the fall in the labor force (not necessarily good news), brought the unemployment rate down to 9.7%. The U-6 underemployment rate (discouraged workers and those that have part-time positions, but would want full-time positions) remains very high, but also fell back to 16.6% from the previous 17.1%. As we expected, the materialization of job creation triggered a job hunt that boosted the total labor force by a whopping 805,000 in April, and now in May we have witnessed a somewhat worrisome correction.
Echoing Bernanke’s concerns, we remain worried about the effects of persistently high unemployment rates on consumption. RGE expects the unemployment rate to peak at 10.1% in Q1 2011.
The Bad News
- Headline numbers were weaker than expected. The change in non-farm payrolls came in at a disappointing 431,000, against the 536,000 expected by the Bloomberg consensus. For more details, see the RGE Critical Issue: Will the U.S. Labor Market Recovery Stall After the Census Effect Fades?
- Unlike in the previous month, the change in private payrolls does not tell an encouraging story. Private payrolls increased by a slim 41,000 against the 218,000 of the prior month and against the 180,000 expected by consensus.
- The household survey echoed and outpaced the establishment showing an ugly 35,000 in job losses. The survey includes self-employed workers, part-time workers and small businesses, which are not captured by the BLS survey. Until recently, the household survey was lagging the establishment survey, but it showed strong job gains starting in January 2010—a positive sign that has clearly reversed in this report.
- Last month we placed the increase of the unemployment rate in the “bad news” category, though in fairness, it was not a sign of deterioration of labor market conditions as much a sign of the large slack still present in the markets, which will prevent strong wage growth and might impact negatively personal consumption. This month, we cannot fully read the reduction of the unemployment rate as good news, given that it did not come on the backdrop of strong hiring, but on a reduction in the workforce.
This report was clearly full of bad news. This is not encouraging as the recovery fails to give signs of self sustainability. We have been arguing for some time that income generation is the ultimate driver of private consumption. Private consumption grew a strong 3.5% in the first quarter of 2009 (as we expected). As we argued in our U.S. Outlook, income generation from Census hiring is likely to be very limited (less than 0.1% of annual income), therefore signs of strong hiring in the private sector are what we would like and need to see. While the surge in private employment for two consecutive months (in March and April) is a clear sign of recovery, we remained skeptical about the full self-sustaining nature of it and this latest job market report is nothing but a confirmation of our concerns. We still believe that the second half of the year will display weaker growth as personal consumption growth aligns with income growth, inventory growth aligns with final sales (still a weak spot) and fiscal stimulus turns neutral or becomes a drag on growth. Moreover, Census layoffs will negatively affect the headlines in the second half of the year. In normal times, the labor market needs to create around 130,000-150,000 jobs per month to absorb increases in the work force; clearly given the slack in the market, job creation must go substantially beyond that range to reduce the unemployment rate during this recovery. This is consistent with our forecast of unemployment peaking at 10.1% in Q1 2011.
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No Responses to “Goodbye V-Shaped Recovery: Payrolls Surge and Disappoint”
it is going to be a painfull recovery… led by emerging markets.. like india and china, not to over commit, they are also faced with domestic constraints, like property bubble in china and high inflation in India. In india most likely there will be further rate tightening in july when RBI is exoected to raise crr / slr by .25 basis and will surprise market if they also increase and repo and the base interest rate also by .25 basis points.at the most we can expect a begining of recover again in 1st half of 2011.