Friday, June 4, 2010

From Hysteresis to Hysteria?

On Wednesday, I wrote a post claiming that US jobs are not just about census hiring. I expected a "monster jobs report" and stuck my neck out. And today, I got slammed!

The US economy added 431,000 but most came from hiring 411,000 temporary census workers. In fact every single news media focused on census hiring, so I'd like to dig a little deeper into the May jobs report.

First, Justin Lahart of the WSJ reports, Hiring Recovery Sputters:
Private employers did little hiring last month, undermining hopes that the economic recovery was gathering pace and helping send U.S. stocks down more than 3% on the day.

The U.S. economy added 431,000 jobs in May, nearly all from census hiring. The private sector added only 41,000 jobs. The unemployment rate fell to 9.7%. Phil Izzo, Sudeep Reddy, Dennis Berman and Evan Newmark discuss. And Jon Friedman looks at ways to save Newsweek, the venerable news weekly.

The Labor Department said Friday that 431,000 jobs were added in May. But the vast majority were temporary workers hired by the government to conduct the 2010 Census. Private-sector employment rose by only 41,000, the smallest monthly increase since January. Without faster private-sector job growth, the U.S. faces a bumpy recovery restrained by households with little income to spend.

Renewed fears about U.S. growth and the financial turmoil in Europe sent the Dow Jones Industrial Average tumbling 323.31 points, or 3.15%, to 9931.97—the Dow's second slide below 10000 in two weeks. It was the blue chips' lowest close since Feb. 8 and the third-biggest point and percentage decline of 2010.

The economy's prospects are made all the more challenging by the unrelenting concerns over Europe's sovereign-debt crisis. European stocks fell sharply on concerns about Hungary's solvency, and the euro dropped to $1.1966, its lowest late-day New York level since 2006.

The U.S. jobless rate dipped in May, to 9.7% from 9.9% the month before. But that was largely due to discouraged workers giving up the job search, as well as the Census hires. Those positions added 411,00 workers.

The dim jobs report undercut President Barack Obama's attempts to call attention to the recovery. In a speech in Wednesday, Mr. Obama said, "We've now added jobs for five of the last six months, and we expect to see strong job growth in Friday's report." Although the president Friday described the new data as "a sign that our economy is getting stronger by the day," few analysts saw it that way.

"It's a disappointment," said J.P. Morgan economist Michael Feroli, who had expected a gain of 140,000 private-sector jobs. "Businesses are still very hesitant to hire. The risk is that we never really make that turn into seeing big full-time hiring and unemployment stays elevated."

In May, there were still 8 million fewer workers on private payrolls than when the recession began in Dec. 2007. The Census-fueled jump in federal government hiring was offset by a loss of 22,000 jobs at state and local governments, where fiscal strains are prompting cutbacks.

The jump in Census jobs will quickly reverse. Historically, May is the peak month for hiring people to canvass homes for the decennial census. In May 2000, Census hiring hit 348,000. The next month, it fell by 225,000 and showed significant declines for three more months. The loss of Census jobs could be even quicker this time. High unemployment has given the Census Bureau a strong pool of workers to hire from, and many door-to-door operations are ahead of schedule as a result.

Concerned about the economy, or pressed to find people with the right skills, many companies are giving their existing workers more overtime.

Jack Horstman, president of Firstar Precision in Parma, Ohio, says he's been trying to hire two new workers, but so far hasn't found qualified prospects. Firstar makes air-driven tools used by auto makers, food processors and industrial firms, and with a growing backlog, the 29 people working at the company are getting stretched thin.

"We're working as hard as we can work right now," he said. "We're working tons of overtime. We're working Saturdays."

He recently put an ad in the paper looking for skilled machinists and got a couple of hundred applicants who, he says, "were everything but what we were looking for. There's an awful lot of people who I just don't think are going to find jobs."

Many of those who lost jobs during the recession have skills that don't translate easily into the work now available. This skills mismatch could mean that long-term unemployment will persist. In May, some 46% of the unemployed had been without work for more than six months, more than any time since the Labor Department began keeping track in 1948.

In a sign that many employers are opting for overtime rather than hire additional workers, the average workweek for employees on private payrolls rose to 34.2 hours in May from 34.1 hours in April.

Companies are also shifting more part-time employees, which the government defines as those working fewer than 35 hours, into full-time jobs.

Manufacturers added 29,000 jobs in May, down from 40,000 in April. The Obama administration has pinned hopes on an increase in U.S. exports leading to a revival in manufacturing jobs that will help alleviate high unemployment. But while manufacturers are doing more business in developing countries like China, many are responding by increasing production overseas.

"We tend to build products where they are sold," explained Chris Kearney, CEO of SPX Corp.

The Charlotte, N.C.-based maker of industrial and diagnostic equipment reduced its U.S. headcount from 8,000 to 6,800 during the recession and has only done incremental hiring in the U.S. in recent months.

Tacoma, Wash.-based warehousing and transportation firm Tri Pak Inc. has seen business pick up as shipping traffic at the ports of Tacoma and Seattle recovers. But rather than add to its full-time rolls, Tri Pak has been giving its 60 employees more hours and using temporary workers to fill the gaps.

"The rule is keep your current people doing more than they normally do until you're sure the economy is solid," said Tri Pak president Cory Sonnen. He says he does anticipate hiring a few permanent employees in the months to come.

I'd like to mention two points from the article above. First, the longer people remain unemployed, the harder it is for them to find work. In late May, Clive Crook of the FT wrote an excellent article, American monumental job losses, and honed in on this point:

A key issue is indeed hysteresis: the likelihood that lengthening spells of unemployment become self-perpetuating, as skills erode or grow irrelevant. Adding to this danger of a growing long-term unemployment is the overhang of part-time workers, whose hours can be increased as an alternative to new hiring. The more limited use of temporary lay-offs - easily reversed in the upswing - will also depress job growth. And there may be a worsening mismatch between the workers available and the workers companies will need.

On that last crucial point, note the structural impact of the recession. It fell with sudden and exceptional force on particular industries, notably construction, which the bubble had inflated to unsustainable levels. Some of those jobs will never return. The house-price collapse has saddled millions with houses they cannot sell because of negative equity. This is bound to depress worker mobility. In the past, Americans have always moved eagerly from slow-growing to fast-growing regions.

But as disappointing as this latest jobs report was, it was nowhere near as bleak as so many bears will have you believe. Liz Wolgemuth of US News & World Report writes, Why the May Jobs Report is Better—and Worse—Than it Looks:

Census hiring made last month's employment picture look pretty good, as total employment grew by 431,000. But tear off the 411,000 temporary jobs added to the federal government's payrolls for the decennial census, and the picture gets fuzzy. Private-sector employers added just a tenth of the jobs tied to the census. The Labor Department

considers those 41,000 jobs to be "little" change—hardly what any economist, job seeker, or Washington lawmaker wants to see at this point in the fledgling recovery (and this close to November elections).

The unemployment rate slid back to 9.7 percent, after rising to 9.9 percent in April. April's higher figure actually seemed to reflect a kind of optimism among those who were out of work and had given up looking during the recession, as they reentered the labor force to try again and pushed up the Unemployment rate. But last month, the number of unemployed re-entrants fell by 286,000. In general, the May jobs report is more closely aligned with other job data, particularly jobless claims, which have been depicting a less rosy job market than that drawn in previous monthly employment reports.

It was bad news for construction: The construction industry was hammered by the housing bust and economic freefall, but had finally begun to add jobs in recent months. Not last month. Construction employment dropped by 35,000 jobs—enough to largely offset the gains made over the previous two months. The job losses spanned the construction sector, according to the Bureau of labor Statistics.

But good news for manufacturing: Manufacturing added 29,000 jobs in May. Factory jobs have jumped by 126,000 over the last five months. Joshua Shapiro, chief U.S. economist at MFR, calls the sector "red hot," noting that increasing hours in the average manufacturing workweek pushed the average workweek for all private workers up to 34.2 hours in May from 34.1 in April. "This outdistanced market expectations of no change," Shapiro says.

There were positive signs for the future: The average workweek rises because employers are giving their existing employees more hours to work to meet increasing demand. The number of temporary help services jobs jumped by 31,000 in May, bringing the total number of new temp jobs to 362,000 added since September. These signs point to stronger employment growth ahead, according to Morgan Stanley Research economists Ted Wieseman and David Greenlaw. "The payroll employment result was disappointing, but almost everything else in the report was stronger than anticipated," the economists wrote in a morning report. "The bottom line is that we continue to anticipate job gains of about 200,000 per month (ex-census) over the balance of the year."

Economists' expectations for wage growth were well surpassed last month. Average hourly earnings jumped by 7 cents, or 0.3 percent. Economists were expecting growth closer to 0.1 percent. Average hourly earnings have jumped 1.9 percent over the past 12 months. Another positive sign: The number of part-time workers who want full-time jobs or had their hours cut fell by 343,000 to 8.8 million in May.

Last month's sluggish private-sector growth was clearly the low point of the report. "The question is whether the dip in payroll gains is simply one of the minor but inevitable hiccups we will hit on the path toward recovery or is it indicative of larger issues that could result in a double-dip recession," says John Challenger of outplacement firm Challenger, Gray & Christmas. "It may be too early to tell. The next several months should provide better clues as to the sustainability of the recovery."

Let me share some concluding thoughts on the May jobs report. I spoke with Yanick Desnoyers, Assistant Chief Economist at the National Bank of Canada this morning and he told me that according to the household survey, 650,000 part-time jobs were lost but 600,000 full-time jobs were created. "What would you rather have? This is very positive news".

Yanick added:"People are focusing on Europe, but fundamentals in the US are improving. I think you will see more discrimination going forward based on fundamentals."

For his part, Stefane Marion, Chief Economist at the National Bank of Canada wrote another excellent comment on the jobs report:

Non-farm payroll employment rose 431,000 in May. The bulk of this increase, however, came from the addition of 411,000 temporary workers for Census 2010. These jobs will begin to decline as soon as next month. Private sector payrolls were only up 41,000 in May, the weakest showing in four months. This is disappointing, but it should be kept in mind that a slow month of job creation is not unusual when coming out of a recession.

As today’s Hot Chart shows, the three month moving average is currently running at 140,000, in line with the two previous recoveries. Also, we note that full-time employment has been increasing at a 300,000 monthly pace since the start of the year (even after excluding Census employment, they were still up 214,000 in May).

We continue to think that the earnings backdrop remains favourable for a pick-up in private-sector job creation in the coming months. In the meantime, note that the private sector wage bill rose 0.7% in May, the third robust increase in a row. As shown, despite slower job creation, the wage bill is currently expanding at a 5% annual clip in Q2, the strongest showing since early 2007. This will continue to support consumption. The U.S. economy recovery has not been derailed.
Bottom-line: While the May jobs report was disappointing, it's nowhere near as bleak as many believe. One month's data will not make the difference. Lots of hysteria out there, but the reality is that US fundamentals are improving and this will eventually spill over into the labor market.

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