Employment Numbers: You Can't Put Lipstick on a Pig

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Includes: AGG, DIA, SPY
by: Ockham Research

What goes up, must come down. This simple rule may give us insight into what to expect from the employment reports in the second half of the year. It has been widely reported that the vast majority of employment gains in the month of May were due to temporary hiring of government census workers. So, while the headline number shows payrolls rose by 431,000, only 20,000 of those were created in the private sector. Still the headline unemployment number fell to 9.7% and the U6 number fell to 16.6%, which some may argue is a silver lining for consumer confidence. However, the government’s murky “birth death model” adjustment accounted for some of this improvement in headline unemployment rates. The BLS has flexibility in “adjustments” for the size of the labor market but there is little visibility into the specific reasoning or methods used.

With payrolls expanding largely due to temporary government hiring, it makes for an uphill battle in the latter half of the year as those jobs begin to disappear—some imminently. Census hiring has likely peaked and will soon slow and then turn into a negative for the jobs report. Obviously, if the private sector does not begin adding a meaningful number of jobs, expect the unemployment number to remain high and possibly rise in the second half of 2010—just in time for the November election. Were this to occur, confidence in the recovery would be shaken, negatively impacting consumer spending–by far the largest source of domestic economic growth.

One particularly distressing leading indicator of job growth is that the number of workers re-entering the labor force was negative in May. May traditionally sees a jump in the labor force because of all the new graduates entering the job market, but this was not this case last month as 286,000 workers left the labor market tally. May actually reversed a trend of re-entries that had been improving since last summer. Perhaps the month’s stock market swoon served to sour a few on finding work, but we cannot imagine it was the overwhelming factor in the minds of job-seeking Americans.

In an attempt to be balanced, the report did offer some positive signals as manufacturing hours worked were stronger than expected, which is a positive indicator for industrial production. We can infer that businesses are beginning to rebuild inventories after allowing them to become very lean over the last year. Furthermore, average hourly earnings rose by .3% during the month, as wage inflation has been lacking for quite some time and has severely lagged a rebound in corporate profits.

While last month does mark the fifth straight month of employment gains, in our view this may be the weakest report thus far this year. The labor market is not hemorrhaging jobs like it did last year, but we think job growth will continue to be sluggish. This is especially true as the temporary jobs start to work against the headline numbers in the second half.

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