January 4, 2008

Job market flashing recession

by Jared Bernstein with research assistance from James Lin

The unemployment rate jumped up to 5% last month, and non-government payrolls fell by 13,000, in a far weaker job report than was expected, according to the Bureau of Labor Statistics report on the labor market for December 2007. Total payrolls rose by 18,000 the weakest month for job growth since August 2003, the last month of the jobless recovery.

Though one month of particularly weak jobs data does not necessarily signal a new, negative trend, a broad set of indicators throughout today’s report suggest the weakening economy has finally reached the job market:

• Weak job growth. Though December’s net gains were the lowest this year, and the lowest since the end of the jobless recovery four years ago, payroll growth has slowed since June, adding an average of 84,000 jobs per month, compared to 147,000 January-May of this year. While monthly values from the BLS Household Survey are too volatile to be reliable, over the year, employment in this survey was essentially unchanged, up 0.2%.
• Rising unemployment. While the jobless rate remains relatively low, at 5%, an uptick of this magnitude (up 0.3%) has historically been either a symptom or a harbinger of recession. Moreover, the increase in unemployment was not isolated among any one group-joblessness increased significantly among all demographic groups. Unemployment is up 0.6% over the year, adding 895,000 to the jobless rolls.
• Decline in employment rates. The share of the population at work is another important measure of labor demand. It also fell 0.3 points last month, and is down 0.7 points over the year, a historically large drop.
• Hiring was weak across most industries. Less than half of private sector industries were expanding last month, the worst showing in over four years. The private-service sector, the core sector of job growth in our economy, added only 62,000 jobs last month, its lowest month since October 2005. Also, there was a very large jump?from 4.5 million to 4.7 million, the highest level in over four years?in persons working part-time who were unable to find full-time jobs.

Manufacturing and construction both posted large negatives last month, down 31,000 and 49,000, respectively. While the housing meltdown continues to batter employment among residential builders and contractors, non-residential building also fell steeply. This is of particular concern, because in earlier months, non-residential building offset some of the losses on the residential side.

EPI’s housing employment index, which includes sectors directly and indirectly related to the housing market (i.e., real estate and credit intermediaries), shows the dramatic turnaround in housing jobs as a result of the bursting housing bubble. Jobs in the index fell 30,000 last month, and are down 264,000 this year. In 2005, during the heart of the housing boom, they were up 388,000.

The sharp manufacturing job loss is another big disappointment from today’s report. As the value of the U.S. dollar has declined in foreign markets, U.S. exports of manufactured goods have increased. These output gains have not yet, however, translated into job gains. To the contrary, last month’s loss was the largest since August. Over the year, factory jobs are down 212,000, or 1.5%, the worst year performance in four years. Within manufacturing, the biggest losses are from the auto sector, down 6,300 over the month and 74,000 over the year.

With today’s data release for December, we can examine the 2007 full-year growth rate (December 2006 compared to last month). Total job growth was up 1% for the year, the slowest year since 2003 (see Figure A), adding 1.3 million to the nation’s payrolls, 1 million less than last year’s gain. Unemployment, as noted, ended the year at 5% compared to 4.4% last December. Averaging over the full year, the unemployment rate was low in historical terms?4.6%, the same rate as last year. However, the average masks the important fact that the rate has climbed quickly over the year (see Figure B ).

The softening of the job market has predictably translated into weaker earnings growth for the 80% of workers who are blue-collar in manufacturing and non-managers in services. Hourly earnings, before inflation, were up 3.7% for the year, compared to 4.3% last year. Weekly earnings, which take into account hours worked per week, reveal greater deceleration, up 3.4% this year compared to 4.6% last year.

Quarterly results provide a closer look at this slowdown in earnings. At an annualized rate, hourly earnings grew 3.3% this quarter compared to 4.1% last quarter. The comparable values for quarterly weekly earnings were 3.1% versus 3.7%.

With consumer inflation running in the 4% range, this implies falling real wages for most workers. Given the decline in home values and the negative national savings rate, it is difficult to see how consumers will be able to provide the needed stimulus to keep the economy from falling into recession, if it hasn’t already.

While monthly payrolls can undergo significant revision, the negative findings from today’s report are consistent with the considerable slowing of the overall economy. The uptick in the unemployment rate alone, which will not be revised away, is flashing recession. At this point, we can almost surely put aside the question as to when the overall economic headwinds will reach the labor market. They’re here.

The most important course of action now is for policy makers to craft an economic stimulus package to jump start the stalled economy. In coming days, EPI will be posting policy ideas in this area.

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

EPI offers same-day analysis of income, price, employment, and other economic data released by U.S. government agencies. For more information, contact EPI at 202-775-8810.