Labor Market Conditions Remain Weak, Pace of Job Losses is Slowing

Civilian Unemployment Rate: 9.7% in August vs. 9.4% in July, cycle low is 4.4% in March 2007.

Payroll Employment: -216,000 in August vs. -276,000 in July, net loss of 49,000 more jobs after revisions of payroll estimates for June and July.

Hourly earnings: $18.65 in August vs. $18.59 in July, 2.6% yoy increase vs. 2.7% yoy increase in July, cycle high is 4.28% yoy increase in Dec. 2006.

Household Survey - The August employment report painted a picture of continued weakness in the labor market, but there is a significant moderation in the pace of job losses. The unemployment rate is a lagging economic indicator and is most likely to move up higher in the near term even as signs of a receding recession grow stronger. The 9.7% jobless rate in August isthe highest since June 1983. The number unemployed has risen by 7.4 million since the current recession commenced in December 2007. The jobless rate has risen 4.3 percentage points from the cycle low reading of 4.5% in May 2007.

The broad measure of unemployment (includes 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) recorded a new high of 16.8% (see chart 2) in August.

Establishment Survey – Non-farm payrolls fell 216,000 in August, after revisions of June and July show a net loss of 49,000 more jobs than previously estimated. The pace of job losses has moderated significantly from 700,000 jobs on average reported for the three months ended February to 491,000 jobs in the March-May period to 318,000 jobs lost on average during the three months ended August (see chart 3). A total of 6.9 million payroll jobs have been lost since December 2007. Robust job growth is unlikely to accompany an economic recovery that is projected for the second-half of 2009. The 2009 recovery is most likely to be marked as the third economic recovery in the post-war period that will be coined as a “jobless recovery.”

The moderation in loss of temporary jobs (see chart 4) is a positive sign of underlying labor market conditions as businesses retain temporary help.

The August diffusion index is another piece of evidence that hiring conditions are improving gradually. The diffusion index in August (35.2), indicative of the number of firms expanding payrolls, is at the highest level over the past year.

Highlights of job losses/gains in August:

Construction: -65,000
Manufacturing: -43,000
Services: -80,000
Retail trade employment: -10,000.
Professional and business services: -22,000
Temporary help: -6,500
Financial activities: -28,000.
Health care employment: +27,900

During August, the average workweek (33.1 hours), factory work week (39.8 hours) and factory overtime hours (2.9 hours) held steady. The index of hours worked fell 0.3% during August, while the index of man-hours in the factory sector also dropped 0.5%, which bodes poorly for industrial production in August. A small increase in the wage and salary component of personal income is predicted for August.

Conclusion – The FOMC is on hold until June 2010. Continued weakness in hiring in the months ahead is the most likely scenario, marked with a rising unemployment rate, despite a pickup in economic activity. The Fed will be inclined to wait until labor market conditions show meaningful signs of hiring before it begins to reduce the monetary accommodation in place.