Weekly Economic Update: May 6, 2011

Volume 59 | Number 6   

Payroll employment rose a stronger than expected 244,000 in April, with 46,000 in upward revisions to the previous two months.  The results now give us three straight months with more than 220,000 new jobs.  The household report showed a -190,000 decline in new jobs, resulting in an increase in the unemployment rate to 9.0%.  However, private wage sector employment in the household report rose 259,000.  The payroll and household report both show strong job gains in the private sector over the past three months, with payroll averaging 253,000 and household averaging 245,000.  The payroll report has government jobs down an average -20,000 a month over the past three months, while the household report has the government down just -5,000 on average in that period.  The weakness in the headline number for household report jobs this month came from a sharp decline in those reported as self-employed – often a euphemism for unemployed.  These jobs are down an average -71,000 over the past three months, suggesting the strengthening jobs market is shifting hangers-on into the wage sector.

The bulk of the job gains in the past three months have been in low pay service sector positions.  Manufacturing, which has been the strongest sector in the economy, added 29,000 jobs in April – exactly the three month average and barely higher than the 26,000 three month average three months ago.  Temporary employment, which tends to be concentrated in light manufacturing, has slowed in recent months.  The rise in the share of workers who are part time for economic reasons in the household report suggests that there is not a shift to more full time and permanent positions.  Hiring in leisure and hospitality has risen to an average 51,000 over the past three months after no gain in the previous three months.  This sector alone accounts for roughly 40% of the improvement in job growth during the past three months compared to job gains in the prior three months.

There is also reason to discount the strength in service employment in this month’s payroll report – which showed a rise of 224,000 compared to an average of 187,000 in the previous two months.  Virtually all the rise was due to a 27,000 gain in hiring at general merchandise stores after a decline of -27,000 in March.  This flip-flop is likely associated with the late Easter.  Meanwhile, three private sector reports – ADP, the Non-manufacturing ISM and NFIB – all show services losing steam in April after strength in February and March.  These reports may reflect movements later in the month after the payroll report data was collected.

One impact of the improved growth in low pay jobs is a much slower growth rate in average hourly earnings – which cooled to just a 1.6% annual rate in the past three months compared to the prior three.  Thus, the benefit of stronger employment growth has been offset by lower wage gains, so that wage earners buying power appears to still be trending at a 4.4% annual rate – before adjusting for inflation.  True, average wages in the past three months rose at a 5.6% annual rate when compared to the previous three months – but the prior three month on three month growth rate was just 3.1%.  The 4.3% average annualized growth rate in wages over these six months is almost exactly the 4.2% average of the previous year.  This stability long term growth is mirrored in the pattern of both real and nominal GDP growth, which seesaws up and down quarter to quarter, but continues to trend along at the same rate as early in the recovery.

Bottom line, job growth appears to be broadening into the low pay services sectors, which will maintain – but not accelerate – the economy from its trend growth rate.  To see faster growth than the 2.8% average of the past seven quarters, consumers need to be able to increase spending on domestically produced goods beyond the limits of their own income growth.  That requires either a shift away from imports, an increase in borrowing, or a decline in interest rates to free up buying power.  The greatest probability for lower import demand would come from a drop in oil prices.  The slide below $100 this week is a start, but a much larger move is needed to be meaningful.  A substantial increase in borrowing seems unlikely give the sorry state of the housing market, but again the recent drop to 3.16% on the ten year note is a start.  The more likely path to consumer spending above and beyond earnings is from a renewed refinancing cycle.  The recent decline in long term mortgage rates has just started to percolate through the Mortgage Brokers’ Application Index from a low level of activity.  A strong sustained refinancing cycle like in the early part of the millennium is needed – but unlikely given the indebtedness of those most needy of lower payments.


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