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Economy in Brief

by Bob Brusca FINALLY-A Jobs Report That Adds Up June 1, 2007

157K Jobs+ Wage Pressures+ Hours Worked Up = Strength

The May employment report, viewed in isolation, is a strong report. Put in the context of the feeble April report, however, it more accurately puts the economy on more stable footing. Year-to-date, the economy is averaging a rise of 133K jobs per month (payroll report). That compares to about 118K needed to hold the rate of unemployment steady - a good benchmark for growth in an economy with a 4.5% rate of unemployment. Holding the line on that number would be excellent if we could do it. And we should view the Fed as trying to do that while keeping inflation in its golden range of 1% to 2%. And by the way in April, the core PCE deflator fell into the top of that range.

The chart on the left shows trends in jobs according the usually-favored payroll report, the unruly household report and the HH-report’s labor force growth measure. All these series show faltering growth rates. That’s the rub.

Reality world not ceteris paribus…In the world of ceteris paribus (all other things equal) declining rates of job growth would be pointing to weaker economic growth and might be something to worry about. But this is a world where job growth is slowing IN STEP WITH reductions in labor force growth. Economic growth still might slow, but in such a world the slowing is not viewed as a problem. It is simply a new reality. The key here is that, with an aging population, labor force participation is dropping again (after a cyclical boost) and so it is not clear how fast the labor force will grow and therefore how fast the economy can grow. It is this confusion that has vaulted the rate of unemployment to the head of the class as the MAIN labor market gauge of late. Along with it are data on wages (average hourly earnings each month) as a check to see if labor scarcity is driving up wage costs. Ironically one way to arrest the decline in labor force growth is to boost wages and draw more into the labor force by increasing labor force participation rates. While having more growth is a good thing, the Fed is concerned about the wage that is paid relative to productivity and there, another ugly trend is exposed. Productivity growth is/has been fading.

Many think that the competition from workers overseas will keep a lid on wages, but that only goes so far, as most US jobs created are in services and many services simply must be provided locally (granted, not all) and that insulates labor to some degree from foreign competition. What we see so far is that in May services wages are up at a 3.9% pace and MFG wages are up at a 2.5% pace underscoring this trend. Moreover, 80K MFG jobs have been shed in the first five months of 2007 while 619K jobs have been added in private services. Not only are wages being limited in MFG by foreign competitions but the jobs themselves are disappearing (a strong form of ‘wage restraint’?).

Additionally construction jobs have declined by 13K YTD. It is odd how the large problem of job losses in MFG is getting so much less attention than housing and sub-prime mortgage problems that are written about endlessly. The ongoing economic story of note is the incredible shrinking MFG sector - at least as a source of jobs. Economic studies show that mom and dad’s profession is the best predictor for junior’s future job, so I guess if either of them is a factory worker the predictor is that junior will be UNEMPLOYED.

The strongest case for services workers as being insulated from foreign competition is made for longshoreman and teamsters who face NO international competition, but also plumbers, electricians, and waiters and for the most part doctors and teachers. And so on… to varying degrees. The first table below makes it clear that service sector jobs in the aggregate do not show much sign of slowing. The slowing has been in construction and manufacturing jobs. The second table below looks at the all-important services sector in a bit more detail.

Services is where the job creation is and has been. It’s not a new story as the share employed by MFG has been in a long trend decline but it is a stark reminder when services jobs are growing and MFG is shrinking in absolute terms - not just growing more slowly. Since 1989 the average Yr/Yr MFG growth rate for jobs is -1.12% nearly exactly what it is in May (-1.15%). Average private services growth has been 2.03% over that period and compares to 1.94% today. But that small difference shaves about 70K off private services jobs growth per month.

The circumstance and outlook. On balance the economy is under the stress of internationalization, aging population and technological innovation - the three horsemen of the apocalypse. But just maybe we have headed them off at the pass… The budget deficit is huge; the trade deficit is in uncharted waters (even relative to GDP), and the US economy is being propped up (quite nicely, thank you) by international capital flows while the fiscal deficit is slowing sinking but with further threats on the horizon. In these circumstances the economy is performing quite well. Job growth seems to be stable and the Fed is back in its preferred inflation target zone - if only just barely.

The key question for the future is how long can this last? In case you missed it THIS IS NIRVANA to an economist, at least statistically.

The May employment report makes it look as though we can go on like this for some time. But wages are a problem in that report as they are slightly elevated in their growth. Construction is still impaired. But if we are putting some of these problems behind us like the inventory cycle in MFG as well as the industrial ‘rationalization’ that has centered on autos, and then the housing bubble that has whacked construction, we should be encouraged by growth prospects once the negatives that are afflicting MFG and construction are diminished – and that seems to be well in train. It now seems that the services sector has been up to the task of supporting the economy while its goods sector was under various stresses. We should regard the prospects for second half growth in 2007 as being MUCH brighter indeed. April pessimism has brought May optimism; it’s no rhyme but it’s a much better economic reality.

Monthly Employment Report Summary
Average Monthly Job Changes For Various Intervals and Sectors
Job Gains By Period Recent Monthly Job Gains 3-Mo AVG Gains Yr/Yr AVG Yr/Yr: Last
--and by category May-07 Apr-07 Mar-07 May-07 Feb-07 May-07 May-07
Total Jobs 157 80 175 137 159 160 202
  Private Jobs 135 59 152 115 137 135 187
  Construction 0 -21 51 10 -14 -2 30
Manufacturing -19 -20 -23 -21 -10 -14 1
  Durables*** -15 -11 -15 -14 -10 -10 7
  Nondurables -4 -9 -8 -7 0 -4 -6
Private Services 154 98 120 124 157 148 151
Unemployment rate* 4.5 4.5 4.4 4.5 4.5 4.6 4.8
Avg Hrly Earnings** 0.3% 0.2% 0.3% 3.3% 4.1% 3.8% 3.7%
Hours Worked** 0.5% -0.3% 0.8% 4.2% 0.4% 2.0% 3.1%
1-Mo Diffusion: MFG 39.3 30.4 30.4 33.4 43.3 43.0 50
All Nonagricultural 54.9 53.1 55 54.3 55.7 55.7 60
Private Less Construction 135 80 101 105 151 138 157
Private Less Health & Education 81 1 102 61 97 92 151
Jobs: Average monthly Change By Services Category
May/07 1-Mo Mo-Ago 3-Mo 6-Mo 12-Mo Prev 12 Mo Share-Private
Private Services 154 98 124 140 148 164 100.0%
Trade Transport & Utilities 10 -6 16 20 21 23 28.4%
  Wholesale 9 15 9 9 8 12 6.4%
  Retail -5 -25 3 8 6 3 16.5%
  Transport & Warehouse 5 2 2 3 6 8 4.9%
  Utilities 2 1 1 1 0 0 0.6%
Information 5 9 5 7 4 -1 3.3%
  Telecommunications -1 1 -1 0 0 -2 1.0%
Financial Services 2 -7 -2 3 7 21 9.1%
Professional Business Services 32 21 16 27 32 56 19.2%
  Professional & Tech 27 26 21 23 22 28 8.2%
  Management 1 3 2 3 3 4 2.0%
  Administrative 3 -8 -7 1 7 24 9.1%
  Employment Services -7 -25 -15 -10 -5 11 3.9%
  Temp -9 -3 -7 -4 -3 12 2.8%
Education, Health & Services 54 58 54 47 44 39 19.6%
Leisure & Recreation 46 12 27 31 36 23 14.5%
Other Services 5 11 8 6 4 4 5.9%
Government 22 21 22 22 25 13 --
Federal 0 0 -1 -1 -1 0 --
State 6 4 4 6 6 4 --
Local 12 5 12 10 13 5 --
Private Less Health & Education 100 40 70 93 104 125 --
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