Nothing New: Labor Market Is Still Soft

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by: Erik Dellith

The latest statistics show that the economy continues to add jobs, but at a slow pace. Does the recent weakness in the manufacturing sector cast a darker shadow over the recovery?

Dimming A Bright Light?

Not too long ago, the manufacturing sector seemed to be a brighter spot in the economy. New orders for manufactured goods increased in eight months last year. And the two slips that we saw in the latter half of the year were effectively insignificant relative to the growth rates that we saw in the other four months (2.00%, -0.67%, 3.75%, -0.99%, 1.36%, 1.24%, respectively, according to the U.S. Census Bureau). The first quarter of this year also looked pretty hot, as new orders increased at seasonally adjusted rates of more than 3% in January and March, easily making up for February's 0.28% decline. The second quarter, though, started off on a down note, as new orders dove 1.23% in April. Still, relative to the gains earlier in the year, April's number seems to be just a slight setback.

This leads us to the industrial production figures provided by the Federal Reserve. Here, too, we see that the manufacturing sector has been moving along at a relatively good clip. Industrial production in the manufacturing sector increased each month in the latter half of 2010, and it continued to climb into this year, advancing 0.6%, 0.2%, and 0.6% in the January through March period. In April, we saw manufacturing hit the wall: industrial production dropped 0.4%, marking its first decline since June last year and its most significant decline since it fell 1.2% in May 2009.

As we look at this data, it is important to remember that one month does not make a trend. It is easy enough to reflect on the numbers and think that the manufacturing sector is simply taking a breather before continuing to grow.

If that is, indeed, the case, then the loss of 5,000 manufacturing jobs in May should not be overly worrisome. Figure, in the latter half of last year, the economy added 17,000 manufacturing jobs (according to data from the BLS). Even including the lost positions in May, the manufacturing sector still added 129,000 jobs this year. That seems to be pretty good momentum. A momentary pause in this case should not be surprising or troubling.

Still, I'm a bit concerned.

Reason For Concern

Arguably, payroll employment is a concurrent indicator, so seeing the job losses in May suggests continuation of the slowing in manufacturing that we saw develop in April, when both industrial production and new orders fell. The sense of unease grows a bit as we focus on specific areas, particularly the production of non-durable items. Two of the last three months saw job losses in this area, including the shedding of 13,000 positions in May. (Strength in durable-goods production, other than motor vehicles which also experienced weakness, partially offset this decline last month.) That paints a somewhat bleaker picture.

In "Consumer Spending in the Age of the Jobless Recovery," I mentioned that if we focused exclusively on personal spending, we would likely determine that the current recovery is a bit slower than what we saw following the 1990 and 2001 recessions. While a sluggish consumer was not necessarily a big deal following those two earlier recessions, as residential investment picked up and buoyed growth, there is more reason for concern now.

Manufacturing has, net, added jobs this year, and it seems to be taking a breather. Unfortunately, that breather could turn into a longer-term break given the weakness in consumer spending and the protracted problems in housing. Do not be surprised if GDP forecasts get trimmed. While the economy still appears to be growing, the latest statistics suggest that the pace of that growth is slower than what we saw just a couple of months ago.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.