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Employment Situation: Tone is Improving, But Robust Gains Not Here Yet

Contributed by Northern Trust

By Northern Trust

Civilian Unemployment Rate: 9.6% in August, virtually steady for three straight months. The unemployment rate was 5.0% in December 2007 when the recession commenced. Cycle high for recession is 10.1% in October 2009 and the cycle low for the expansion that ended in December 2007 is 4.4% in March 2007.

Payroll Employment: -54,000 in August, matching the July decline, net gain of 123,000 jobs after revisions of payroll estimates for June and July. Private sector payrolls rose 67,000 in August after an upwardly revised gain of 107,000 in July.  Revisions of private sector jobs in the June-July months added 66,000 jobs.

Private Sector Hourly Earnings: $22.66 in August vs. $22.60 in July, 1.7% yoy increase vs. 1.8% increase in July.

Household Survey - The unemployment rate increased slightly to 9.6% in August after holding at 9.5% for two straight months.  Essentially, the unemployment rate has been nearly steady for three straight months.  The participation rate also inched up to 64.7% in August.  The broad measure of unemployment (including those working part-time because they cannot find full-time jobs and those not looking for work but want and are available in addition to those included in the tally of unemployed in the headline jobless rate) rose to 16.7% in August from 16.5% in July.  The cycle high for this gauge of unemployment is 17.4% in October 2009 (see chart 1).

Long term unemployment, measured by the duration of unemployment, appears to have peaked in May 2010 (46%).  In August, 42% were unemployed for 27 weeks or more, which is a noteworthy reduction of 4 percentage points in the past three months.

Establishment Survey - Nonfarm payrolls fell 54,000 in August, matching the decline in July.  A decline in temporary government jobs related to Census 2010 accounts for the loss in overall payroll employment.  Census-related employment peaked in May (+564,000), with only 82,000 employed in August.  Private sector employment moved up 67,000 in August after upwardly revised gain of 107,000 jobs in July.  Year-to-date, private sector payroll employment has risen 763,000 compared with a loss of 4.204 million over the first eight months of 2009 and 4.66 million jobs for all of 2009.

On a year-to-year basis, private sector non-farm payroll employment has turned positive for two months in a row.  The diffusion index indicates that employment gains in August were less widespread compared with the March-April months (see chart 5).  These data suggest that labor market conditions are turning around, albeit at a very gradual pace, with the March-April period as the relatively stronger months of employment gains.

Construction: +19,000 vs. -4,000 in July

Manufacturing: -27,000 vs. +34,000 in July

Autos: -21,600 vs. +22,300 in July

Private sector service employment: +67,000 vs. +70,000 in July

Retail employment: -5,000 vs. +7,000 in July

Professional and business services:+20,000 vs. -3,000 in July

Temporary help: +16,800 vs. -9,000 in July

Financial activities: -4,000 vs. -11,000 in July

Health care employment: +28,200 vs. +22,800 in July

Construction employment rose 19,000 in August, reflecting largely a return of workers on strike in July.  The wide swings in auto sector employment in August (-21,600) and July (+22,300) are due to a change in the usual layoffs and recall pattern for annual retooling of auto plants.  Private sector service employment increased 67,000 in August, nearly equal to the gain posted in July.  Temporary employment has risen each month since October 2009, with the exception of July 2010, and added 392,200 jobs.  Health care employment continues to advance with an increase of 28,200 recorded in August.

Hourly earnings advanced 0.3% to $22.66 in August, putting the year-to-year gain at 1.7%.  The recent trend of hourly earnings continues to present no inflationary threat.  Personal income is predicted to post a moderate increase in August.  The manufacturing man-hours index held steady in August pointing to the possibility of steady to small decline in industrial production in August.  The change in the timing of auto plant shutdowns for retooling has affected computations of seasonally adjusted auto production and thereby overall factory production.

Conclusion - Bernanke's unequivocal reassurance on August 27, 2010 that the Fed stands ready to act decisively if deflationary pressures appear or if economic conditions remain soft remains at the front of the radar screen in financial markets.  Prior to Bernanke's speech, incoming data pointed to noticeably weakening economic conditions, with the disappointing housing market reports raising the intensity of concern.  However, economic data published this week convey slightly less worrisome conditions to the extent the ISM manufacturing composite index moved up in August, the Pending Home Sales Index of July advanced, and today's employment data show a trend of small but stable gains in private sector employment.  On a comparative basis, private sector payroll employment ranks better than the 1991 and 2001 so-called "jobless recoveries" but falls short of the vigorous gains seen in other economic recoveries (See chart 6.)  Chart 6 is an indexed chart where payroll employment at the trough of each recession is set equal to 100.  A reading of 102 implies a 2.0% increase in employment from the trough and 98 stands for a 2% reduction in employment.  In the months ahead, the FOMC will be watching for signs of stronger performance to make a case for watching from the sidelines rather than taking action to prevent a double dip.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.