Good News, Bad News, But Mostly Good
Raymond James
By Scott J. Brown
May 9, 2011
The April Employment Report was better than expected, reflecting a strong trend in private-sector job growth. That’s the good news. The bad news is that the economy continues to face a number of headwinds, which should restrain the pace of growth in the near term. The economy is improving, but it’s still not as strong as we’d like to see at this point.
The establishment survey data typically show large unadjusted increases in payrolls each spring. Prior to seasonal adjustment, the private sector added 1,159,000 jobs last month, the largest April gain since 2005. Last year, the rate of job destruction trended down to very low levels. This year, new hiring finally appears to be picking up.
The unemployment rate rose to 9.0% in April, from 8.8% in March (it was 9.8% in November). The household survey showed a 190,000 drop in employment. Why the difference between the two surveys? There are some differences between what the two surveys measure, but the biggest reason for the discrepancy in April is simply that monthly changes in levels from the household survey are unreliable. The household survey covers about 60,000 households. You’re not going to get good estimates of levels (the size of the labor force or the level of employment), but you get reasonably good estimates of ratios (labor force participation, the employment-to-population ratio). Still, such ratios are only going to be accurate to about 0.2%, leading to some variation from month to month.
Labor force participation has drifted down over the last couple of years, making the unemployment rate look better than it really is. Unemployment insurance benefits were extended in the December tax agreement, but they still cut off after 99 weeks. One would expect labor force participation to decrease as individuals exhaust their unemployment insurance benefits. On the other hand, labor force participation will tend to increase when the job outlook improves, as more individuals on the sidelines become encouraged about finding a job. Thus, the unemployment rate can be unreliable as a month-to-month gauge of labor market strength or weakness. The employment-to-population cancels out any noise in labor force participation, giving a more realistic picture of slack in the labor market. The employment-to-population ratio has been little changed over the last year, and appears to be somewhat at odds with the stronger pace of private-sector job growth reported recently.
There was no noticeable impact from higher gasoline prices in the April jobs data. However, the impact of higher gasoline prices typically shows up with a lag. So we could still see signs of a more significant slowing in economic activity in the weeks and months ahead. Some of the speculative element was wrung out of the commodity market last week, but gasoline prices should remain relatively elevated in the near term. Average hourly earnings rose modestly in April and have failed to keep pace with inflation this year. That implies some restraint for consumer spending growth, but there is enough job growth to lift aggregate wage income, which will provide some support.
State and local government shed another 22,000 jobs in April, down by 467,000 since December 2008 (in comparison, federal government payrolls rose by 72,000 over this same period). Austerity moves are well intended, but they are a drag on overall economic activity in the near term. State and local government subtracted 0.36 percentage point from GDP growth over the last two quarters – not a huge impact, but normally this sector would be adding 0.20 to 0.30 percentage point.
In 2008, the last time gasoline prices rose above $4 per gallon, the economy was already in a recession. This time, higher gas prices are hitting when the economy has a good deal of positive momentum. We should easily avoid a recession this year, but growth will be slower than we’d like to see in the near term.
(c) Raymond James
