- The latest employment numbers, combined with another round of negative news from Europe, fueled a sharp sell-off in the equity market last week and a further “flight-to-quality” rally into Treasuries and the dollar.
- However, a closer review of the full employment report does not support the doom and gloom fears associated with the soft headline private-sector payroll print.
- The payroll series revealed strong gains in factory sector activity, the average workweek, and average weekly earnings, while the household series showed a sharp drop in the underemployment rate and a rise in full-time employment.
- Another gain in the aggregate hours worked index for April and May also suggests that real GDP growth in 2010:Q2 is likely to come in north of the 3 percent reading registered in 2010:Q1.
Weakness in Private Sector Payrolls Largely Offset
Nonfarm payrolls grew by 431,000 in May. Although this was the largest one-month increase since a 472,000 gain back in March 2000, it was about 100,000 to 175,000 below market consensus estimates as private-sector payrolls increased just 41,000. The soft private-sector payroll reading stemmed largely from a smaller-than-expected 37,000 increase in private service-producing jobs in May, versus a 156,000 gain in this component in April. A portion of this weakness could have been due to the aggressive census-worker hiring.
The economic impact of the small increase in private sector employment last month was largely offset by a rise in the hours worked index and an improvement in average weekly earnings. Market participants often place too much emphasis on the private payroll readings and in the process either overlook or ignore the data on the workweek and wages, yet it is these two components that often play a key role in generating the wage and salary growth that is the building block to personal income and ultimately personal spending.
Historically, a 0.1 hour change in the average workweek is the economic equivalent of 250,000 jobs, while a 0.1 percent rise in wages is the income equivalent of 100,000 jobs. In contrast to the weak private jobs data, the average workweek rose 0.1 hours in May to 34.2 hours, while private weekly earnings rose a robust 0.5 percent last month. Likewise, the aggregate hours worked index for all private sector workers increased 0.3 percent in May, after rising 0.4 percent in April. This placed the April/May average 3.6 percent above the 2010:Q1 reading. Barring a drop in productivity or a sharp drop in the aggregate index in June this implies a solid gain of at least three percent in real GDP in 2010:Q2. In addition, the manufacturing sector revealed additional signs of improvement last month. Factory payrolls increased 29,000 in May, while the factory workweek surged 0.3 hours to 40.5 hours. The strength in factory payrolls and the factory workweek point to another strong increase in industrial production in May.
The Workforce and Quality Jobs
The household series revealed that the civilian unemployment rate edged back down to 9.7 percent in May, from a 9.9 percent in April, as the workforce declined 322,000, after an outsized 805,000 rise in the labor force in April. Although household employment declined 35,000 in May, this represented just a token retracement from the 550,000 gain that was reported in April. On a year-to-date basis, household employment has increased by more than 1.6 million people, which is consistent with the recent rise in Federal income tax withholding receipts. This, in turn, suggests that the payroll employment series may be undercounting the net job creation that is unfolding in the U.S. economy.
Interestingly, the number of people employed part time for economic reasons declined 343,000 to 8.8 million in May. Moreover, full-time employment increased 625,000 in May, boosting the increase in full-time employment since January to more than 2.2 million people. The latest shift from part-time to full-time employment helped to lower the so-called underemployment rate (the unemployment rate plus people who want to work but have given up looking for work as well as those people that have settled for part-time work that want to work full-time) to 16.6 percent in May, from 17.1 percent in April and a cycle high near 17.5 percent late last year. The improvement in full-time employment may also explain a portion of the unexpected continued strength in the consumer confidence/sentiment surveys released over the last several weeks.
Corporate Profits – Provide Support for Real GDP and Employment
Lost in the latest challenges associated with the events in Europe and the soft private-sector payroll data was another round of strong corporate earnings. U.S. corporate profits rose 31 percent year-over-year in the first quarter of 2010, slightly faster than the 30.6 percent in 2009:Q4 and the largest quarterly gain since 1984. Since 1950, there have been only six other periods in which corporate profits increased at a 30% or faster pace. Interestingly, each of these six periods was followed by real GDP growth and net employment growth of at least 3 percent and 1.9 percent, respectively, in the following year.
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