Unemployment in America

Economics

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Unemployment in America

Labour without force

| WASHINGTON, DC

THE best that can be said about the June jobs report is that it doesn't signal a return to recession. Total employment fell 125,000, but this was because of an end to some temporary jobs conducting the federal census. Private payrolls rose by 83,000. That's soft, and less than expected, though better than May's revised increase of 33,000.

Unfortunately, the guts of the report aren't much more uplifting. The private work week, after rising to 34.2 hours in May, fell back to 34.1 in June. In terms of the amount of labour being used throughout the economy, that's the same as a drop of 300,000 in payrolls. Average hourly earnings actually fell, by 0.1%. That may fan fears of deflation given the already low readings on inflation. I think that's premature. Hourly earnings have been generally rising, albeit sluggishly, and the June drop could be a one-time move.

Finally, while the unemployment rate did drop, to 9.5%, an 11-month low from 9.7%, it dropped for the wrong reason: a lot of people stopped looking for work. This might be because a Senate impasse led to the expiration of extended unemployment insurance benefits early in June. The number of recipients has been falling by about 200,000 per week since. Some of these people may have stopped looking for work (a requirement to qualify for benefits), and thus are no longer counted as unemployed. Census layoffs may have also played a part.

For what it's worth, the household survey (used to calculate the unemployment rate) showed a much bigger drop in employment, of 301,000, than the payroll survey. The rule of thumb is that when the two differ, go with the payroll survey.

A lot of the softness in June seems related to a slowdown in the manufacturing sector. Though factory payrolls rose a hair, that was far offset by a big drop in hours: the factory work week fell to 40 hours from 40.5, although in April it was only 40.1. This reinforces the message from the recent purchasing managers' indexes, that the inventory restocking that was fueling a V-shaped recovery in the industrial sector is petering out. Without a follow through from household and business spending, the industrial sector won't be providing much oomph to the economy.

All that said, this tells a story of moderate growth, not of a dip back into recession. As UBS notes, total hours worked rose at a 3.3% annual rate in the second quarter, an acceleration from the 2.4% reading in the first. This is consistent with GDP continuing to grow at around a 3% rate, just a bit above the economy's potential growth rate. The economy already faces some headwinds from expiring fiscal stimulus (the unemployment benefits and the home-buyer tax credit are the most obvious examples), and those headwinds will build over the coming six to nine months. The test for the recovery is whether private demand will be strong enough to overcome those headwinds.