Deconstructing Non-Farm Payrolls
Friday, June 1st proved to be something of a re-run in the financial markets. Yet again, edgy and anxious investors reacted negatively to what was deemed by the media an appalling Employment Situation Report. The Bureau of Labor Statistics (BLS) estimated (based on its firm survey) that just 69,000 new jobs were created in May. The number reported was far lower than the whisper number (150,000) making the rounds in the days prior to the announcement.
Predictably, investors panicked sending equity share prices lower and Treasury note and bond prices higher. When the markets closed, the S&P 500 Index was down 2.46 percent for the day. Year-to-date, the index return is still positive (up 2.57 percent), but just shy of a 10 percent loss from its April 2nd high. Predictably, bad news for stocks was seen as good news for bonds, U.S. Treasury debt in particular. Ten year note yields closed the day at 1.45 percent, down 14 basis points from the prior day. Each passing day in the Treasury markets brings new records as yields plumb new lows.
We cannot say we were completely surprised by the May employment report. The 2008/9 contraction was the third in a string of asset price recessions suffered by the U.S. The path to recovery from bubble-induced recessions is more arduous and more prolonged than downturns arising from an excess of inventories. Until the 1990/91 recession, prior post-war U.S. economic downturns were generally induced by what economist call "involuntary inventory accumulation". As sales slow or contract, inventories pile up forcing businesses to cut back production. Unemployment rises, incomes and investment fall until excess inventories are worked down — at which point firms re-start idled production lines, in the process kicking off the next economic expansion.
When the overhang is in the form of houses, office buildings or miles of fiber optic cable (as in the 2000/1 tech bubble recession), the inevitable adjustment process takes years, not just a matter of months. With a glut of long-lived assets, businesses, government or individuals have little incentive to invest in new hotels, hospitals or homes. Throw into the mix, worries about the health of the financial system, strained government finances and uncertainty regarding future tax policy, a reluctance to commit to new projects becomes an urge to remain liquid and hold cash regardless of the opportunities forgone. This is the situation we currently find ourselves.
Construction spending, coming out of the Great Recession, is depressed. Assuming June 2009 marked the downturn's trough, total construction spending is lower by about 10 percent. This in marked contrast to the previous six recessions. In the past, at the current stage in the expansion, the median change in construction spending (from the recession's trough) was a robust positive 29 percent. Even when compared to just the two past asset price recessions current spending also lags.
Weakness in construction spending translates directly into weakness in construction employment. At roughly 5.5 Million, jobs in the building trades are down over 2.2 Million from pre-crisis highs. Although construction related employment accounted for only a small portion (roughly 5.7 percent) of total non-farm payrolls at the zenith of residential construction spree, those jobs were the most vulnerable when the boom turned to bust. Absent a broad, concerted national infrastructure program on par in size and scope to the construction of the Interstate Highway System initiated by the Eisenhower administration, there are few public works projects which can make an immediate dent
Like-it-or-not, until the fiscal and financial conditions improve sufficiently to coax private investors to once again finance the construction of new homes, office buildings, hotels and factories, there is little chance of igniting a self-sustaining building boom. So, for the time being at least, as long as unemployment remains high in the building trades, employment growth unfortunately is likely to be weak.
Based on an analysis of the 2008/9 and prior six U.S. recessions as determined by NBER. Construction payroll data from the BLS; construction spending (private and public) obtained from the Census Bureau. All data seasonally adjusted.
(Sources: Census Bureau (CB); Bureau of Labor Statistics (BLS); National Bureau of Economic Research (NBER); AIFS estimates.)
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