GLOOMY NEWS ON U.S. EMPLOYMENT / ROUBINI GLOBAL ECONOMICS WEDNESDAY NOTE ( VERY HIGHLY RECOMMENDED READING )

GLOOMY NEWS ON U.S. EMPLOYMENT

Greetings from RGE!

Good economic news has been hard to come by over the past couple months—and the most recent U.S. employment report was no exception to the trend. As we noted in a recent RGE Analysis, the report surprised to the downside, less because headline employment retreated (this was expected due to Census layoffs) than because weekly hours worked, average hourly earnings, and private sector payroll gains all took a plunge.

Let’s take a look at the data. First, it’s worth highlighting the positive: The private sector continues to create jobs. After some strong private job creation in March and April (an average of 200,000), May disappointed with only 33,000 private jobs created. Private hiring was better in June with 83,000 jobs—still a bit short of the 110,000 consensus.

There is also quasi-good news in that the unemployment rate fell to 9.5%, though this was in fact spurred by a sharp fall in labor force, and thus isn’t necessarily good news. The U-6 underemployment rate (which includes workers who have part-time positions but want full-time positions as well those who have given up looking for work) remains very high but also fell back, marginally, from 16.6% to 16.5%.

Unfortunately, these positive or semi-positive factors are accompanied by a slew of clearly negative signals. For starters, the change in private payrolls came in a bit weaker than hoped: 83,000 jobs were created versus the 110,000 that consensus expected. This is considerably below the 200,000 average job creation in March and April.

The household survey echoed and outpaced the establishment survey, showing an ugly 301,000 jobs lost. The drop is bigger than can be explained solely by Census firing. Indeed, the household survey reported a 166,000 decline in private sector employment. The survey includes self-employed workers, part-time workers and small businesses, which are not captured by the BLS survey. Until recently, the household survey was lagging the establishment survey, but it showed strong job gains starting in January 2010—a positive sign that has clearly reversed in the last two reports.

The average workweek and temporary employment are leading indicators for the labor market since firms increase work hours, hire temporary workers and move workers from part-time to full-time before hiring new full-time workers. The economy continues to add workers albeit at a slower pace—20,000 in June versus 30,000 in May—and temporary employment has risen 192,000 so far in 2010. The bad news is that the average workweek fell to 34.1 hours after reaching 34.2 hours in April. The workweek in the manufacturing sector fell back as well, down to 40 hours (back to March) after reaching 40.5 hours in May. This is not good for income generation.

Even worse for income generation, average hourly earnings month over month fell 0.1% against an expected positive 0.1%. Additionally, so far, 882,000 jobs have been added in 2010 (private payrolls have risen by 593,000) and at this pace it will take five years just to recover the over 8 million jobs lost during the recession.

The median unemployment duration continued to increase in June 2010, rising to 25.5 weeks—a series high from 23.2 in May. Over 45.5% of unemployed workers have been jobless for six months or more. There is little to alleviate concerns about the deterioration of human capital.

The diffusion index of employment continued to fall in June. It fell to 52.2 from 54.8 in May and 68 in April. Since an index value of 50 indicates a balance between industries cutting jobs and industries adding jobs, the June number certainly falls in the bad news category, as it suggests that payroll gains are less broad-based than in previous months.

Clearly this was a weak employment report. This is not encouraging as the recovery is failing to give signs of self-sustainability. We have been arguing for some time that income generation is the ultimate driver of private consumption, and that is faltering now. While we don’t expect much contribution to growth coming from most aggregate demand components (public spending will be neutral at best and most likely a drag, a strong dollar will keep the contribution of net export to growth flat; investments will be weak as capacity utilization remains low and housing loses steam on the expiration of the tax credit) we are again at the mercy of the U.S. consumer.

The U.S. consumer will have to continue to deal with sluggish income generation, tight credit markets, losses of wealth coming from housing and lately from equities as well. As we argued in our Q2 2010 U.S. Outlook, income generation from Census hiring is likely to be very limited (less than 0.1% of annual income). Therefore, signs of strong hiring in the private sector and income growth are what we would like and need to see. Even if the surge in private employment for two months in a row (in March and April) is a clear sign of recovery, we remain skeptical about the full self-sustaining nature of it, and this latest job market report only confirms our concerns.

We still believe that the second half of the year will display weaker growth as personal consumption growth aligns with income growth, inventory growth aligns with final sales (still a weak spot) and fiscal stimulus turns neutral or becomes a drag on growth. In normal times, the labor market needs to create around 130,000-150,000 jobs per month to absorb increases in the work force. Clearly, given the slack in the market, job creation must go substantially beyond that range to reduce the unemployment rate during this recovery.