May 4, 2007
Weakening Economy Catches Up to the Job Market
By Jared Bernstein with research assistance from James Lin
The nation’s payrolls added 88,000 jobs last month, according to the Bureau of Labor Statistics, the smallest increase since November 2004, and a potentially ominous signal that the slowing economy is finally catching up to the job market. The private sector added only 63,000 jobs, and hours worked in that sector were also down significantly across the economy. These and other measures in today’s BLS report raise the concern that weakening job and income growth will start to slow consumption, the one component of overall growth that has been consistently strong.
After a slight downward revision to earlier gains this year, payrolls have been expanding at a monthly average of 118,000 over the past three months. When compared to the 195,000 monthly average in the prior three months, payroll growth has decelerated by 77,000 jobs per month. If this trend persists, unemployment will rise as job seekers begin to outnumber job openings.
Unemployment ticked up insignificantly from 4.4% to 4.5%, as employment fell sharply (-468,000) in the more volatile Household survey. However, the size of the labor force also shrank, shaving two-tenths off the share of the population participating in the job market and thus keeping the unemployment rate from rising more quickly.
In another sign of a less-tight labor market, growth in average hourly earnings is slowing (see Figure). Hourly earnings were up 0.2% last month, and 3.7% over April 2006. While still a decent nominal growth rate, that is the slowest annual gain since last May. Adding the impact of declining average weekly hours, weekly earnings fell slightly in April and are up 3.4% over past year, about one percentage point slower than March’s comparable figure of 4.3%.
Source: Bureau of Labor Statistics.
As employment and wage growth slow—especially in a climate where energy and food prices are pushing up inflation—consumers will be hard pressed to continue boosting overall consumption, the one consistently strong component of gross domestic product growth.
Given the ongoing slump in the housing market, one key sector under scrutiny is residential construction and related industries. Both home builders and residential contractors shed jobs last month, as did real estate offices, but these losses were joined by cutbacks in non-residential construction in April, bringing overall construction down 11,000.
Factory employment continued its long slide, shedding 19,000 jobs in April, and down 151,000 over the past year. The fact that almost every sub-industry lost jobs last month, both in durable and non-durable manufacturing, underscores the extent of the weakness in our nation’s manufacturing sector.
All told, only 53.4% of industry sectors added jobs in April, the lowest measure of industry hiring activity since October 2005. Total hours worked in the private sector fell 0.4% in April, the largest monthly decline since June 2004. On a yearly basis, this measure is down 1.2%, well off its recent pace. Unless this value climbs in coming months, we will not be generating the hours and income needed to maintain the recovery’s momentum.
Job market data on households revealed little change in unemployment rates last month, but the share of the population at work, which had generally been trending up lately, fell by 0.3 percentage points to 63.0%. By education level, there was a large employment rate drop for both high-school dropouts (-0.8) and college grads (-0.6), suggesting potential weakness in labor demand for both highly educated and less-educated workers (these monthly changes can be volatile, however).
Another weak sign from the Household survey was the 96,000 increase in the number of part-time workers who would rather have full-time jobs. At 4.4 million, the number of these under-employed workers is the highest it has been since September 2005. This growth helped push the “under-employment rate” (the BLS measure of labor underutilization) up to 8.2% from 8.0% in March.
How worried should we be about the weakness in today’s employment report? As suggested above, if these trends in payroll growth and employment rates worsen, the majority of households will find themselves increasingly squeezed. Along with higher prices, many of these consumers are facing higher levels of mortgage debt, and with home prices falling, refinancing is less of a source of ready cash now than in recent years. True, the stock market has been quite frothy of late, but these returns are concentrated among those at the top of the wealth scale. Most households depend on their paychecks not their portfolios. Without considerably stronger job growth, the threat of a recession will begin to loom large.
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