The employment situation is a set of labor market indicators. The unemployment rate measures the number of unemployed as a percentage of the labor force. Nonfarm payroll employment counts the number of paid employees working part-time or full-time in the nation's business and government establishments. The average workweek reflects the number of hours worked in the nonfarm sector. Average hourly earnings reveal the basic hourly rate for major industries as indicated in nonfarm payrolls. (Bureau of Labor Statistics, U.S. Department of Labor) Why Investors Care
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Highlights
Payroll employment in January surprisingly fell for the first time in over four years. Today's numbers indicate that the Fed has been justified to aggressively cut interest rates. Nonfarm payroll employment in January fell 17,000, following revised increases of 82,000 in December and 60,000 in November. The consensus had expected a 58,000 gain in payroll jobs. The initial December estimate of an 18,000 increase was revised up 64,000 from the original estimate of 18,000 and November was revised down 55,000 from the previous estimate of a 115,000 increase. For December and November combined, the net revision was up 21,000.
As usual in recent months, within the payroll survey weakness was in the goods-producing sectors. Manufacturing fell by 28,000 in January, following a 20,000 drop in December. Construction jobs decreased 27,000 in January after a 45,000 decline the previous month. Natural resources & mining rose by 4,000 in December.
The service-providing sector was positive but nonetheless slowed dramatically, rising a modest 34,000, following a 143,000 gain in December. Even in this sector there was not much good news. The latest month was led by education & health services, up 47,000, and by leisure & hospitality, up 19,000. Declines were led by government (mainly state government education), down 18,000, and by professional & business services, down 11,000.
On a year-on-year basis, nonfarm payroll employment slipped to up 0.7 percent in January from up 0.8 percent in December.
On the inflation front, average hourly earnings posted a 0.2 percent gain in January, following a 0.4 percent rise the prior month. The January rise in wages was below the consensus forecast for a 0.3 percent increase. The average workweek edged down to 33.7 hours from 33.8 hours in December.
For manufacturing, the average workweek held steady at 41.1 hours in January. Aggregate hours in manufacturing were unchanged in January, following a 0.6 percent drop the month before.
Turning to the household survey, the civilian unemployment rate edged back down to 4.9 percent from 5.0 percent in December and matched the consensus forecast for a dip to 4.9 percent. Household employment rose 37,000 in January, following a 436,000 drop in December. The labor force slipped 42,000 in January, while the number of unemployed decreased 79,000. The household survey is much smaller than the payroll survey and the employment numbers are more volatile than the payroll numbers.
Today's report indicates that labor markets have softened significantly despite the downtick in the unemployment rate and provide the first clear signal that the U.S. could be in recession. Payroll employment is a key component of the Conference Board's index of coincident indicators, which helps to define the business cycle, including the "official" start of recession. While today's negative employment number is disconcerting, it would take several more months of decline before recession is official and the Fed's aggressive rate cuts may kick in soon enough to preclude that. But there are two technical issues that should be kept in mind. First, it is very difficult to seasonal adjust employment before and after holiday periods-including January. Second, we have already seen an initial estimate of a 4,000 decline for August 2007 being revised back into positive territory. There is no doubt that the economy has slowed sharply-but it is not clear that it has turned negative.
Nonfarm payroll employment came in very weak in December with a near-flat gain of 18,000, following an increase of 115,000 in November. The economy is giving mixed signals on where employment might be headed. Most measures of production (such as industrial production and housing starts) indicate lower demand for labor. Yet, initial jobless claims remain low. Markets will be watching to see if we get the first negative number for payroll jobs since August 2003. While job growth has softened, wage inflation has yet to do so. Average hourly earnings rose a strong 0.4 percent December, matching the boost in November. The household survey in December pointed in the other direction - toward a softer labor market. The civilian unemployment rate rose to 5.0 percent from 4.7 percent in November. One thing is clear - the labor market data are very mixed and every facet of the employment report will be picked apart for more clarity on the direction of the economy.
Nonfarm payrolls Consensus Forecast for January 08: +58,000
Range: +25,000 to +120,000
Unemployment rate Consensus Forecast for January 08: 4.9 percent
Range: 4.9 to 5.0 percent
Average workweek Consensus Forecast for January 08: 33.8 hours
Range: 33.8 to 33.8 hours
Average hourly earnings Consensus Forecast for January 08: +0.3 percent
Range: +0.2 to +0.3 percent
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During the mature phase of an economic expansion, monthly payrolls gains of 150,000 or so are considered relatively healthy. In the early stages of recovery though, gains are expected to surpass 250,000 per month. |
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The civilian unemployment rate is a lagging indicator of economic activity. During a recession, many people leave the labor force entirely, so the jobless rate may not increase as much as expected. This means that the jobless rate may continue to increase in the early stages of recovery because more people are returning to the labor force as they believe they will be able to find work. The civilian unemployment rate tends towards greater stability than payroll employment on a monthly basis. It reveals the degree to which labor resources are utilized in the economy. |
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