U.S. Employment Report Signals Recession
7 Mar 08
The February jobs report showed a second successive decline in employment, and a steeper fall than in January. This should end the debate about whether or not the economy is slipping into recession.
The February employment report was worse than expected, showing a loss of 63,000 jobs—the second decline in succession and the worst month since March 2003. Private employment has now fallen for three months in a row, according to today's new data, with the steepest decline (101,000) in February. The increases previously announced for private payrolls in December and January were revised into declines. Private payrolls have now fallen an average 47,000 per month over the last three months.
The debate should no longer be about whether there is or is not a recession, only about how deep it will be. Our forecast anticipates a mild recession, but the continuing tightening of credit market conditions suggests that the risks are on the downside.
The private employment drop of 101,000 this month is the key figure. The headline job decline of 63,000 for February was flattered by an unsustainable 38,000 jump in government jobs. Worse still, the drop in private employment was widespread. The heaviest losses were in manufacturing and construction—no surprises there—but there was a loss of jobs even in the private service sector. Retail trade, financial services, and temporary help all saw sharp declines. Of course, housing-related sectors like residential construction, credit intermediation, building materials stores, and real estate services all saw declines, but the job losses have now spread much more broadly across the economy.
Manufacturing shed 52,000 jobs. Motor vehicles took the biggest hit (down 13,000), but there were declines almost everywhere. Construction lost 39,000 jobs. Residential construction activities lost 26,000 jobs, but nonresidential construction employment was also down, by 9,000. That's bad news, because rising nonresidential construction activity helped cushion the decline in construction employment during 2007. Now, residential and nonresidential construction are both heading down.
In the service sector, 26,000 jobs were added in total, but only because government employment bounced up by 38,000, after an unusually soft 4,000 increase in January. Private services, which have been the main jobs engine for the economy, saw a 12,000 drop in employment this month, their first decline since March 2003. Declines in retail (down 34,000), financial (down 12,000), and temporary help (down 28,000) pulled private services down. Healthcare (up 36,000) showed its usual robust increase, and there was a solid gain in food services and drinking places (up 20,000).
The workweek was steady at 33.7 hours overall, but with employment declining, overall hours worked fell 0.1%, after a 0.4% decline in January. Even if hours worked were to flatten out in March, that would leave hours down 1.5% (annual rate) in the first quarter, after a 1.0% increase in the fourth, suggesting that real GDP is probably declining in the current quarter, after its slim 0.6% increase in the fourth quarter. We expect a drop of 0.5% in first-quarter GDP. Manufacturing hours fell 0.5% in February, suggesting a sharp decline in industrial production.
Average hourly earnings rose 0.3% month-on-month and 3.7% year-on-year, the same as in January, but this is not enough to keep pace with inflation, which was running at 4.3% year-on-year in January. That's bad news for the outlook for consumer spending, with both declining employment and falling real wages hurting consumer purchasing power.
Given the drop in payroll employment, the decline in the unemployment rate from 4.9% to 4.8% looks very odd. But that came about only because the labor force fell even more steeply (down 450,000) than household employment (down 255,000). That's bad news, not good news, because it suggests that people are giving up looking for work.
The report confirms that the economy has slowed very sharply and points to recession, rather than just slow growth. It reinforces our view that GDP will decline in the first and second quarters of 2008. We expect a 0.5% decline in the first quarter and a 0.2% decline in the second quarter—and the second quarter would be worse still but for the help to consumers from tax rebate checks, which should start arriving in May. More job losses are likely, and we currently expect an average monthly loss of around 50,000 through midyear.
The Federal Reserve will respond to this weakness. At least a 50-basis-point rate cut, to 2.50%, on March 18 is in the bag. And there is a real possibility, given the escalating turmoil in credit markets, that the cut will be bigger or will come sooner. Interest rates will ultimately drop as far as 2.0%, and perhaps lower. by Nigel Gault