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U.S. Employment Report Shows Recession Deepening

7 Nov 08

Payroll employment fell 240,000 in October, and the unemployment rate jumped to 6.5% from 6.1%, as the recession deepened.

The October employment report was expected to be bad—and it was. The shocker was not so much October's decline as the huge downward revision to September. October's decline in employment of 240,000 was a bit worse than consensus expectations (200,000), but close to Global Insight's projection (250,000). It would have been the biggest decline so far in this recession—except that September's drop was revised dramatically to 284,000 from the originally reported 159,000. August and September job losses were revised up by a combined 179,000. On top of the bad employment news, the unemployment rate jumped to 6.5% from 6.1%, reaching a 14-year high.

This is the 10th consecutive month of job losses, and the cumulative payroll decline now stands at 1.2 million. We expect that decline to reach 3 million before this cycle is done.

September and October each now show job declines in the private sector of roughly 240,000 (excluding Boeing strikers). That is about 100,000 worse than in August, illustrating just how rapidly the economy deteriorated late in the third quarter. The economy was weakening anyway as the quarter went on, and was then struck by the financial crisis, which reached new extremes in September and October. It seems that firms had previously been cutting back employment only gradually, being cautious on hiring but not aggressive on firing. They have now decided that the recession will be deeper than feared, and are acting more aggressively on firing, as they see demand for their products falling rapidly.

October's payroll employment decline was widely spread. Manufacturing payrolls fell 90,000, the biggest decline this year. The only saving grace is that the decline was exaggerated by the disappearance from payrolls of 27,000 Boeing strikers, who will return next month. But the manufacturing decline would have been the biggest this year even without the Boeing strikers. Construction payrolls fell 49,000, the biggest decline since June, with residential-related construction jobs down 27,000 and nonresidential jobs down 17,000. The bottom is still not in sight. The nonresidential side has been holding up better than the residential side until now, but that is changing, and we expect nonresidential construction activity to plummet in 2009.

Private services employment dropped for the ninth month of the past ten, this time by 131,000, the second monthly decline of over 100,000 in a row. The retail sector was again badly hit, losing 38,000 jobs, split between auto dealers (down 20,000) and department stores (down 18,000). Retail has now shed 277,000 jobs over the past 12 months, and the immediate outlook is bleak as retailers will be very cautious on their holiday hiring. Transportation and warehousing lost 9,000 jobs, with a 5,000 decline in truck transportation—a signal that the flow of goods around the economy is slowing down.

Financial services lost 24,000 jobs, with 12,000 lost in credit intermediation and 6,000 lost in securities. Given the wave of closings and consolidations now occurring across the financial sectors, these declines foreshadow bigger losses to come. Leisure and hospitality, formerly a solid contributor to job creation, shed 16,000 workers, and has dropped an average 19,000 per month since July.

The only major private services area to show job growth was education and health, up 21,000, and the gains were all in healthcare (up 26,000). Private education lost 11,000 jobs. High-end professional payrolls are still rising, as professional and technical services added 13,000 jobs. But temporary help lost another 34,000 jobs.

Government services employment rose 23,000, mostly in state and local governments (up 17,000). It may seem surprising that state and local governments would be adding jobs given their budget woes, but it is misleading to look at October in isolation. Revised figures show that state and local governments shed 43,000 jobs in September, so the October bounce restores less than half of those jobs.

There was no comfort in the figures for working hours. The workweek held steady at 33.6 hours, but might have been expected to edge higher since September's figure was probably depressed by the hurricanes. Overall hours worked declined 0.3%, after a 0.6% decline in September.

Hourly earnings were up 0.2% on the month and 3.5% over the past year. Wage inflation is a non-issue.

The unemployment rate jumped to 6.5% from 6.1%, exceeding the peak unemployment rate (6.3%) reached at the worst point of the last cycle (June 2003). Household employment fell 297,000, while the labor force rose by 306,000. It is interesting that we have not yet seen the decline in the labor-force participation rate usually seen in a recession as people give up looking for work. That probably reflects the intense pressure on household budgets, which is giving a strong incentive to keep looking.

Today's employment report is just the latest in a series of indicators showing that the economy deteriorated rapidly as the third quarter progressed, and is now contracting very sharply. Immediate prospects are bleak. We expect to see job declines of more than 200,000 per month for the rest of the fourth quarter and for all of the first quarter. We expect real GDP to decline more than 3% in the fourth quarter. We expect to see the unemployment rate rise above 8% during 2009.

In response, the Fed can and will do some more on the interest-rate front, and we expect it to cut the federal funds rate to 0.5% (from 1.0%) in December. Meanwhile, efforts will intensify for President-elect Obama and the Congressional Democrats to devise more fiscal stimulus to mitigate the extent of the recession. We expect fiscal stimulus of around $200 billion in total, with a combination of spending and tax cuts, to be implemented late this year and early next.

by Nigel Gault

 
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