January Employment Situation - Mixed Report, Deduce Carefully
Civilian Unemployment Rate: 9.7% in January vs. 10.0% in December, cycle low is 4.4% in March 2007.
Payroll Employment: -20,000 in January vs. -150,000 in December, net loss of 5,000 jobs after revisions of payroll estimates for November and December.
Hourly earnings: $18.89 in January vs. $18.84 in December, 2.5% yoy increase vs. 2.4% yoy increase in November, cycle high is 4.2% yoy increase in Dec. 2006.
Household survey: The unemployment rate moved down to 9.7% in January from 10.0% in December. Employment increased 541,000 and the labor force rose 111,000. 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) fell to 16.5% in January from 17.3% in December. These are impressive numbers but it should be viewed carefully because nearly all recoveries are marked with ups and downs in the unemployment rate before we see a definitive peak.
The probability of a higher unemployment rate in the months ahead is high for these reasons. First, the participation rate in the past 24months is down 1.5 percentage points, the largest drop in a two-year period on record. The labor force continues to decline and there are 1.1 million discouraged workers and 1.5 million other marginally attached workers who have not looked for a job in the past 4 weeks. These workers will return to the labor force as economic conditions improve and account for a higher unemployment rate. In the jobless recovery following the July 1990-March 1991 recession, the participation rate and unemployment rate moved up together (see chart 2) for several before the unemployment rate peaked. Second, there are roughly 10.5 million people collecting unemployment insurance considering regular continuing claims and those under special programs. Therefore, it is too soon to declare the 10.1% unemployment rate of October 2009 as the cycle peak.
Establishment Survey - Nonfarm payrolls fell 20,000 in January, following a revised loss of 150,000 jobs in December. The January report included benchmark revisions going back to 2005. Reflecting the revisions, the number of jobs lost between December 2007 and December 2009 is now 8.4 million vs. the earlier estimate of 7.24 million. In recent months, the pace of job losses has stabilized largely (see chart 3) from a decline of over 700,000 in the early part of 2009 to only 35,000 during the three months ended January.
Highlights of job losses/gains in January:
Construction: -75,000 vs. -32,000 in December
Manufacturing: +11,000 vs. -23,000 in December
Private sector service employment: +40,000 vs. -18,000 in December
Retail trade employment: +42,000 vs. -18,000 in December
Professional and business services: +44,000 vs. +20,000 in December
Temporary help: +52,000 vs. +59,000 in December
Financial activities: -16,000 vs. -7,000 in December
Health care employment: +14,000 vs. +18,400 in December
Other bullish aspects of the establishment survey are seen in the increase in factory employment (+11,000), the first increase since January 2007 and longer workweek in the entire economy (33.3 hours vs. 33.2 hours in December) and factory sector (40.8 vs. 40.6 in December) along with an increase in overtime hours (3.5 vs. 3.4, see chart 5) in the factory sector.
Hourly earnings rose 0.3% to $18.84, putting the year-to-year gain at 2.5% in January, suggesting that labor costs do not present an inflationary threat in the near term (see chart 6). The earnings numbers point to a moderate increase in wage and salary income in January. The 0.7% jump in the manufacturing man-hours index implies a strong increase in industrial production during January.
Conclusion - Although the jobless rate declined and the pace of job losses has slowed noticeably, the labor market situation remains a source of serious concern. A total of 8.4 million jobs have been lost since the recession commenced in December 2007 and the jobless rate is high. Consistent back-to-back gains in employment are necessary to declare the worst is behind us. One monthly decline of the jobless rate is adequate to act on; the FOMC is predicted to stay on hold for several more months.
Consumers Remain Reluctant to Borrow
Outstanding consumer credit fell 4.00% on a year-to-year basis in December, marginally better than the 4.13% drop seen n November. In the fourth quarter, outstanding consumer credit decreased 4.0%, the largest decline in the post-war period. Outstanding credit card debt fell 9.5% in the fourth quarter from a year ago. The positive side of this trend is that households are strengthening their balance sheets. But, in the near term spending is necessary to maintain economic activity on the recovery path.
