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Daily Global Commentary

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Employment Data Allow the FOMC to Effectively Go "Neutral"

Sat, May 5 2007, 01:39 GMT
by Asha Bangalore

Northern Trust

Civilian Unemployment Rate: 4.5% in April vs. 4.4% in March

Payroll Employment: +88,000 in April, after net 26,000 downward revisions to earlier estimates of payrolls in February and March

Hourly earnings: +0.2% from prior month, year-to-year increase is 3.7%, down 55 bps from high of a 4.28% increase in December 2006

Household Survey – The unemployment moved up one notch to 4.5% in April. The jobless rate has essentially held steady between 4.4% and 4.6% for eight straight months. The unemployment rate would be higher if the participation rate had held up instead of declining to 66.0 in April from 66.4 in December. The unemployment rate is behaving in a manner that is typical at business cycle peaks -- a sideways movement for several months before beginning an upward trend.

Establishment Survey – Payroll employment increased 88,000 in April, after a gain of 177,000 in March. The downward revisions to prior estimates of February and March amount to a loss of 26,000 jobs. The BLS adjusts for creation and destruction of new businesses each month that are not captured in its survey. In April, a total of 317,000 jobs were added to the seasonally unadjusted count of payroll employment, implying that the seasonally adjusted increase of 88,000 for April would have been lower if this addition did not occur. The number of new jobs added from birth and death of businesses in April 2007 is the largest on record. Year-to-date, the economy has added 129,000 jobs on average compared with an average gain of 189,000 in 2006. On a year-to-year basis, payroll employment grew 1.37% from a year ago, which is a marked slowing from a cycle high of a 2.14% year-to-year increase in March 2006.

In April, construction employment fell 11,000 and factory jobs declined 19,000. The 116,000 increase in service sector jobs reflects a loss of 25,000 retail jobs, but there were gains of 37,000 and 24,000 health care and food services, respectively, and an increase of 24,000 in payrolls in the professional and business category.

Hourly earnings moved up 4 cents to $17.25, putting the year-to-year increase at 3.73%. The cycle peak for the year-to-year change in hourly earnings appears to be at 4.28%, set in December 2006. The 55 bps deceleration is noteworthy because concern about an upward trend in inflation from rising hourly earnings is becoming less compelling. The payroll and earnings data point to a small increase in personal income during April.

The overall workweek declined by one 0.1 hours to 33.8 hours. The total man-hours index fell 0.4% and the manufacturing man-hours index also dropped 0.4%. The decline in factory manhours index suggests a drop in industrial production during April. The three-month diffusion index of private sector payroll employment (56.8) is the lowest since October 2005. In sum, on all fronts, the employment report of April depicts a labor market that is significantly soft and a rebound in hiring in the near term is not imminent.

Conclusion – There have been a few bullish economic signals in the past week – a stronger-thanexpected ISM manufacturing composite index and a drop in jobless claims. However, the headlines and details of the April employment report have put to rest temporary indications of a likely rebound in economic momentum. Payroll employment data are sending a convincing signal of substantial weakness in hiring across the economy. Hourly earnings show a marked decelerating trend. Core inflation, as measured by the personal consumption expenditure price index excluding food and energy, is heading toward the Fed’s comfort zone of below 2.0% year-to-year gain and the economy has posted sub-par economic growth for four consecutive quarters with growth in the second quarter also shaping up to be much below potential. The confluence of economic events for the Fed to lower its guard on inflation and become more concerned about growth is at hand. Regardless of whether the FOMC moves to a de jure neutral stance at the May 9th FOMC meeting, we believe that is now de facto neutral. With the housing recession now infecting other parts of the economy, most importantly consumer spending, and with core inflation moderating, we expect the FOMC to begin taking out some anti-inflation “insurance” at the August 7th FOMC meeting. Hope it’s not too late!

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Published on  Sat, May 5 2007, 01:46 GMT