U.S. Job Declines Becoming Less Severe, But Unemployment Rate Still Rising Sharply

There was still plenty of bad news in the report. Manufacturing remained a black spot. There was no slowdown in the rate of manufacturing job losses, and the workweek shortened. The unemployment rate also dampened the good payroll news by jumping half a point, as the labor force grew but employment fell. This is a reminder that getting the jobless rate down will be a long drawn-out task, as workers who had previously given up their job search return to the labor force.

In the payroll details, manufacturing cut 156,000 jobs in May, compared with 154,000 in April. Auto industry employment showed another sharp decline (down 30,000). There were continued heavy job losses in most other sectors of manufacturing, notably fabricated metals (down 19,000) and machinery (down 26,000). No major manufacturing sectors added jobs. And the manufacturing workweek, which had risen slightly in April, fell back again to its lowest level yet in this cycle. Total manufacturing hours worked fell 2.1%, a steeper decline than in March or April. The message is that manufacturers have not finished getting their inventories in line with lower demand levels, and are not yet ready to step up production.

But most other sectors brought good news. Construction jobs fell by 59,000, their shallowest decline since September. Job losses in residential construction activity slowed more sharply than in nonresidential construction, consistent with the recent flattening out in housing starts.

The private service sector lost 113,000 jobs, compared with 322,000 in April. Most categories still shed jobs, but at a much slower pace than in April. Retail trade (down 18,000, instead of down 37,000), wholesale trade (down 22,000, instead of down 34,000), and transportation and warehousing (down 15,000, instead of down 44,000) all fell less sharply. The financial sector lost 30,000 jobs, also improving from a loss of 45,000 in April.

Temporary help jobs fell only 7,000, after dropping 55,000 in April. Temporary workers are usually the first to be let go when the economy turns down, and the first to be hired back when it turns up. The last month to see an increase in temporary employment was December 2007, the month that marks the beginning of the recession. Since then, temporary employment has fallen for 17 months in a row, but May's decline is the least severe drop in that series. High-end professional and technical jobs fell 19,000, a sharper drop than in April's 15,000 decline, with architectural and engineering services again hit hard (down 14,000).

Two major private service sectors saw job increases. Education and health payrolls climbed 44,000, while leisure and hospitality employment rose 3,000. While that 3,000 gain may not sound much, it follows declines over the previous three months averaging 35,000. Employment in eating and drinking places rose 9,000, while employment in accommodations was flat, ending a long series of declines.

Government employment fell by 7,000, after a 92,000 increase in April. The federal government had added 86,000 workers in April, most of them doing temporary preparatory work on the 2010 Census. Some of those workers may have begun to drop out of the employment count in May, but the biggest reason for the federal employment decline was a 13,000 reduction in jobs at the U.S. Postal Service. We expect to see further declines in federal employment over the next couple of months as more Census workers drop out. State and local government employment rose by 8,000, after a 6,000 increase in April. It is likely that we will see declines in state and local payrolls as budget cuts kick in for the new fiscal year that begins in July.

The headline unemployment rate rose from 8.9% to 9.4%. The household survey, which determines the jobless rate, showed employment down 437,000 and the labor force up 350,000, so unemployment rose by a steep 787,000. This is a reminder that as the job market stabilizes, we will see the labor force rising as people who had previously given up start looking for work again. The most comprehensive measure of underemployment—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—rose again in May, to 16.4%, up from 15.8% in April.

The report also gave a cautionary warning about consumer incomes, as hourly earnings rose only 0.1% for the second straight month. This, combined with the still-heavy loss of jobs, signals a continuing decline in overall wage and salary incomes, which is bad news for household purchasing power.

Although we expect the economy to bottom out in GDP terms during the second half of the year, job losses should continue throughout 2009, with the unemployment rate peaking just above 10%. We still expect total job losses to exceed 7 million. But the worst news is behind us, and employment declines should progressively soften as the year proceeds.