June 1, 2007

Upside Surprise as Payroll Growth Bounces Back

By Jared Bernstein with research assistance from James Lin

The pace of job growth picked up in May, according to data released today by the Bureau of Labor Statistics.  After adding only 80,000 jobs in April, May’s count increased to 157,000, beating analysts’ expectations by about 20,000 jobs.  Private sector job growth was up 135,000, more than double April’s gain of 59,000. 

One factor holding back the private sector is the persistent slump in manufacturing employment, down 19,000 last month.  Construction employment was also flat last month, reflecting the ongoing housing slump.

Given the economy’s very slow growth through the first three months of the year—real gross domestic product rose at a 0.6% annual rate in the first quarter—May’s bounce-back results were a surprise.  Though job growth of this magnitude is moderate, if it persists, then it is likely fast enough to provide consumers with the needed income growth to propel the economy forward in coming months.

Unemployment held steady at 4.5%, as did the employment rate at 63.0% (i.e., the share of the working-age population with a job).  This latter indicator has weakened over the past few months, down 0.4 percentage points since December, and it remains 1.7 points below the last peak level in the prior recovery (April 2000).  This weakening implies that, even with relatively low unemployment, some slack remains in the job market (more on this trend below).

Job growth has slowed this year compared to last, and it has also been more “choppy,” with good months followed by weak ones.  Monthly gains since January have averaged 133,000, compared to 189,000 last year.  This slowdown is evident in most major sectors, with two important exceptions: health care and government, both of which are growing slightly faster this year than last.

Private service-providing industries added 154,000 jobs in May, led by a solid 27,000 gain in professional and technical firms, such as legal services and computer systems.  Health care added 25,000 jobs in May and 149,000 so far this year.  In fact, as a share of private sector employment, health care represents 11%, yet it has accounted for 28% of private sector gains thus far in 2007.

Recent employment reports tell a tale of two job markets: that of services and that of manufacturers.  Factory employment fell 19,000 last month, 164,000 over the past year, and 3.6 million since its last employment peak in 1998.  Though most sub-industries in both durables and non-durables shed jobs last months, losses were concentrated in autos and car parts, down 9,900.  Since the 1998 peak, the biggest sub-sector losers have been durables such as computer parts, autos, and machinery, and non-durables such as apparel and textiles.

Persistent trade deficits in manufactured goods are a major explanation for these job losses, and currency values in international markets play an important role here.  The dollar has declined in value relative to the Euro, and this has helped generate robust export growth from the United States to Europe.  But fast growing imports from nations such as China—which intervene in currency markets and block dollar adjustment against their own currencies—have offset this export growth and contributed to growing trade deficits and manufacturing job losses.

Unemployment rates were little changed from last month, with the exception of adult African American women, which were up to 6.8% from 6.0%.  However, as noted above, employment rates, especially for minorities, have slid lately, a clear sign of slackening in the job market.  The larger losses for Hispanics may relate to diminished employment opportunities in construction.  However, even college graduate employment rates are down slightly.

Wages continued to grow apace, up 3.8% over the past year, before inflation.  After sliding slightly in April, average weekly hours increased in May, helping to boost the annual growth rate of weekly earnings to 4.1%, which could beat inflation that month.

May’s wage and employment gains, if they persist, are likely to give the economy the momentum it needs to accelerate from its first quarter doldrums.  The question is whether they will persist.  Job growth has both slowed this year, and become more “choppy” month-to-month, with strong months followed by weak ones.  Headwinds such as the slumping housing market and high gas prices remain in place, and real wages have largely been stagnant, constraining consumers buying power.  Flat or declining home prices mean that asset is no longer likely to be a source of economic stimulus.

Whether we continue to generate enough employment and income growth to offset these negatives is the critical question going forward.

Data Note: The BLS publishes two monthly surveys, the Establishment and the Household surveys (ES and HS).  While these surveys have some major differences, e.g., the HS includes self-employed persons, who do not show up in the payroll survey, analysts have noted that even when put on a similar basis (e.g., removing the self-employed for the HS), job gains in the HS have surpassed those of the ES.  This has led to some confusion, as well as some cherry-picking by those with an agenda supported by one side or the other (it is widely agreed upon that on a monthly basis, employment changes in the much larger payroll survey are more reliable).

More recently, however, monthly job changes in the two surveys have come closer in line with each other.  As shown in Table 3 of this  BLS document, over the past year, the difference in the two surveys has amounted to about 8,000 per month (higher in the HS) compared to about 49,000 per month, in the preceding five years of the business cycle from March 2001-May 2006.

Note also—and this has no substantive meaning—last month was the first month in the history of these two surveys that both the HS and ES had the same number for job growth: 157,000.

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The Economic Policy Institute JOBS PICTURE is published each month upon release of the Bureau of Labor Statistics’ employment report.

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