Unemployment Is A Speed Bump, Not A TrendBy Lacey Plache June 8, 2011
After three months of healthy job creation, the labor market recovery slowed in May. According to the Establishment Survey, the economy added a mere 54,000 non-farm jobs, a result that fell far short of consensus expectations of 170,000. In addition, both March and April figures were revised downward to 194,000 and 232,000, respectively. Only 83,000 new non-farm private sector jobs were created in May, compared with the 244,000 added on average in February through April. Key private-sector industries adding jobs included professional and business services, health care, and mining, while other private-sector industries saw little change in their employment levels. The government continued to shed jobs, particularly in local government education. Meanwhile, the Household Survey returned an unemployment rate of 9.1 percent, up slightly from 9.0 percent in April.
This lackluster labor market performance echoed other recently reported economic data. In particular, Gross Domestic Product (GDP) for this years first quarter was not revised upward as expected, remaining at 1.8 percent, well below the 2010 fourth-quarter pace of 3.1 percent. Moreover, the composite index from the ISM manufacturing survey showed a significant slowing in manufacturing growth in May. Combined with continually dismal housing reports, these results have raised the question of whether the U.S. economy is headed for the dreaded double dip. They also imply that the auto market recovery could be at risk as well. However, the potential contribution of employment weakness to any such risk is still relatively small. Employment has not been the key driver of auto sales recently. Moreover, this months employment results are more likely a soft spot, rather than the beginning of a downward trend.
Confidence Driving Auto Sales
Last month, I discussed how recent auto sales momentum had drawn key strength from upward-trending consumer confidence, which in turn had been buoyed by the stock markets bull run. While auto sales certainly would have been helped by improving employment conditions, auto sales began to rise months before any noticeable improvement in employment occurred. Instead, auto sales gained strength shortly after confidence started its own rise. Greater confidence was able to trigger auto sales even before employment grew due to the large amount of pent-up demand that had accumulated during the recession and recovery by consumers who had the means to purchase a new vehicle, but lacked the motivation to buy. As the stock market improved and confidence grew, some of these consumers then returned to the auto market. Employment thus played a secondary role in driving auto sales. As a result, faltering employment growth now does not necessarily spell doom for auto sales.
Or, does it? Confidence also fell unexpectedly in May, as the stock market declined. Much of the stock markets ascent in the past few quarters can be attributed to the governments QE2 treasury buying program. Given that that program is ending this month, its effects can be expected to taper off as well. Unless the stock market draws strength from other sources, auto sales will not be able to rely as heavily on stock market-driven confidence going forward. In this case, such factors as employment and income growth will need to more strongly underpin consumer motivation to purchase autos.
May Employment Soft Spot
Mays labor market performance does not necessarily imply that improvement in employment conditions will not resume. The increase in the unemployment rate resulted from an influx of workers rejoining the labor market, rather than from a net loss of jobs by existing workers. Given the number of discouraged workers who abandoned their futile job searches, thereby dropping out of the labor market, during the recession and sluggish employment recovery, it is to be expected that the unemployment rate will rise as the economic recovery strengthens and these workers reenter the labor market and resume their job searches.
In addition, some key forces behind weak job creation in May are likely temporary. Rising fuel costs in recent months may have resulted in hesitation by firms with respect to hiring. However, oil prices peaked at the end of April and nationwide gas prices shortly thereafter. The Energy Information Administration is predicting that oil and gas prices will not rise much beyond their current levels during the rest of the year. Moreover, recent actions by China and Brazil to slow their economies indicate that demand for oil from these countries may cool slightly, or at least grow more slowly, thereby further easing pricing pressure on fuel. As a result, firms will face less budgetary pressure and uncertainty from rising fuel costs, and thus be more inclined to hire.
A second factor that likely contributed to the slowdown in hiring in May was threatened or actual decreases in production affecting the auto industry, and potentially other industries, due to parts shortages resulting from the Japanese earthquake. The auto industry is the largest single industry in the U.S. economy and affects the economy indirectly through numerous related industries. Thus, any changes in the auto industry can be expected to ripple through the broader economy. Fortunately, the production disruptions from the earthquake should ease beginning in June, when Toyota returns to full production for 8 of the 12 models it builds in the U.S. Honda has announced a return to full production for all models except the 2012 Civic in August. As production returns to normal levels, any related constraints on hiring are likely to lift.
Thirdly, extreme weather conditions, including severe floods and tornadoes, in various parts of the Midwest, South, and East may have caused hiring delays in May as local companies prepared for advancing weather and/or dealt with its aftermath. These weather events appear to be connected to the La Nina weather pattern in play this year, which is associated with an active southern gulfstream. Although more unusual tornadoes have occurred in the past couple weeks, there is some evidence that La Nina is easing, which should reduce such events going forward. In addition, while weather can wreak havoc on firm operations, current and future, at any time, it is rare for weather disturbances to be present for substantial periods of time. Thus, it is reasonable to expect that the weather will normalize in recently affected areas, and any weather-related slowdowns in hiring will decline as well.
Some Positive Employment Signs
It is worth noting that Mays employment report contained some unexpectedly positive elements in addition to the less positive ones. Although hiring slowed, working hours held steady. The average workweek for all employees on private nonfarm payrolls was revised upward for April to 34.4 hours, where it remained in May. The manufacturing workweek for all employees increased by 0.2 hour to 40.6 hours over the month, while factory overtime was unchanged at 3.2 hours. In addition, wage growth topped expectations, coming in at 0.3 percent, compared to 0.1 percent for April. Such results indicate that there is still life in the employment recovery.
Another positive indicator comes from the May ISM Non-manufacturing Index, which is compiled from a survey of firms in a wide range of sectors, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade. Although the ISM Manufacturing Index fell in May, its non-manufacturing counterpart rebounded solidly from a dip in April. In particular, the index showed strength based on accelerations in hiring and in new orders, which bodes well for continued hiring growth.
The Road Ahead
The secondary contribution of employment growth to the auto sales recovery to date implies that it would be inappropriate at this time to forecast a slowdown of auto sales based on a slowdown in employment growth. Indeed, it is even too soon to write off employment growth as a potential driver of the auto recovery. May employment results were disappointing compared to the solid growth of the previous months, but the report contained some positive signs in wage growth and stable workweek length, as well as in formerly discouraged workers rejoining the labor force. Furthermore, some of the likely causes of the slowdown in hiring should resolve or ease in the near term.
In general, it is important to consider that this recovery is different from the usual recovery due to combination of a recession with a financial crisis. Such a combination is rare for the U.S. but research has shown that unemployment has taken roughly 10 years on average to return to pre-recession levels in other countries experiencing this combination of events. Thus, all else equal, we can expect the pace of employment recovery to be slower than usual and to encounter months in which the pace slows or stalls. May appears to be one such month.