The Employment Report and Market Myopia
No economic recovery is without its setbacks. As many steps as we take forward, there is inevitably some pause or reversal in the expansion. Even a cursory review of recent history shows that the return to employment growth, in particular, is likely to be plodding. Increases in demand absorb the slack in firms’ productive capacity; jobs follow. In the first full year after the 2001 recession, for example, the economy added jobs in only three of 12 months. Even in 2003, following a year of solid growth in overall economic activity, employers expanded payrolls in just six of the year’s 12 months.
While remaining attentive to the outlook highlighted in the last few days’ cautionary statements, we must also avoid taking the latest data out of its broader context.
Then, as now, myopic markets often fail to anticipate the inevitably bumpy road to recovery. Perspective may be lost in months of strong job growth, which are often hailed too soon as evidence of a consistent and sustained trend. Describing this April’s better-than-expected jobs report, an economist at a leading investment bank offered that “this is a very encouraging report, supporting our call that businesses have responded, and will continue to respond, to the rebound in demand by ramping up employment growth.” In its assessment of the same report, a leading private economic research firm surmised that “since rebounding from the February storms, private payrolls have risen by over 400,000 and appear to be accelerating. … Private job creation was the missing link of the recovery and it now appears to be coming on stream.”
In contrast with April’s report, job creation in the private sector in May failed to meet expectations. Last Friday’s employment report showed that labor markets added an impressive 431,000 jobs during the month of May. This was the fifth consecutive month of job gains, which now average just fewer than 200,000 jobs per month in 2010. By this measure, the current jobs recovery is more consistent than the last, in 2002 and 2003.
To be sure, the market’s disappointment did not result from the headline statistic, but from the mix of contributors and the relative absence of new private-sector jobs. As was widely reported on Friday morning, temporary census workers accounted for the vast majority of the month’s increase. Controlling for the resulting growth in public payrolls, the private sector added just 41,000 jobs in May.
Detail on the Employment Report
Apart from the middling growth in private-sector payrolls, the employment report contained other important updates for the economic and commercial real estate outlook:
– The headline unemployment rate inched down from 9.9 percent to 9.7 percent. The underemployment rate, which includes persons marginally attached to the workforce and persons working part time for economic reasons, fell from 17.1 percent to 16.6 percent. However, the rate for 25-to-34-year-olds-a key renter demographic-increased from 10.2 to 10.5 percent.
– The mean and median durations of unemployment continue to rise, setting new all-time highs. The average duration of unemployment increased from 33.0 weeks in April to 34.4 weeks in May. The median duration increased from 21.6 weeks to 23.2 weeks. Forty-six percent of unemployed Americans have been out of work for six months or more.
– Consistent with the slowdown in commercial construction, nonresidential construction employment fell by 4,200 jobs. Nonresidential specialty trade contracting employment fell by 16,500 jobs.
– Retail employment fell by 6,600 jobs. The bulk of the decline was at building-materials and garden-supply stores.
– Financial services employment fell by 12,000 jobs. This decline was offset by an increase of 22,000 jobs in professional and business services. In fact, professional employment declined in May but was offset by increases in business services related to temporary help services and administrative and waste management.
Speaking the day before the employment report’s release, Dennis Lockhart, president of the Atlanta Fed, explained that “most indicators suggest that overall economic activity stopped contracting and began growing again starting around July 2009. So the economy is approaching 12 months of sustained recovery, and yet not much has happened in employment markets to reduce the high level of joblessness.”
Lockhart offered reasons for this trend that capture economists’ general consensus on employment growth patterns in the early stages of economic recovery: “… Employment always lags recovery to some extent. Following the previous two recessions, where recovery has been modest, we’ve seen weak job growth. … The answer also lies in a surge in labor productivity growth. … This productivity growth has allowed the economy to expand and firms to record better sales and profits without yet adding many workers to payrolls. Historically, productivity has always been strong just after recessions. So the pattern we’re seeing is not abnormal.”
Keep Calm and Carry on
Absent Mr. Lockhart’s perspective, stock markets were roiled by the employment update. The Dow Jones Industrial Average fell 3.2 percent, reflecting a 3.6 percent decline in the total market capitalization of the United States. Of course, markets have been disposed toward slipping from their recent highs. The employment report may have had less of an impact but for persistent concerns about the health of the euro economies and, on the other side of the globe, attempts to slow the economy in China.
The uncertainty presented by these parallel developments has fomented sharp reactions to any new negative data. The challenges faced by the euro economies and in Britain are largely outside the American sphere of influence. Even though sovereign defaults-or a heightened risk of sovereign default-may keep mortgage and treasury rates low in the United States, instability in one of the world’s major economic zone’s is a headwind for global growth.
The combination of emergent geopolitical risks and the relatively weak employment report has elicited renewed inquiry into whether the recovery has stalled. The soothsayers who have been skeptical of the recovery’s resilience have won the latest round in this debate, at least as measured by their capture of the past weekend’s press quotes. While remaining attentive to the outlook highlighted in the last few days’ cautionary statements, we must also avoid taking the latest data out of its broader context. It remains the case that the underlying conditions for a return to modest payroll growth in the United States remain in place.
Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.