The Perplexing Case Of The Plummeting Payrolls

The August report on the U.S. labor markets was bad news for the economy. Or was it? The headline grabber was a loss of 39,000 jobs from company payrolls, compared with a widely expected gain of 140,000 or so. A deeper look at the numbers, however, reveals a somewhat brighter picture--one that's a lot less worrisome for third-quarter economic growth.

Despite the lower job total in August, the workweek across most of the economy rose, as did hourly earnings, and the unemployment rate continued to edge down. Also, the Labor Dept. discovered some 50,000 more people at work in July than first reported, lifting that month's gain to 211,000, from 162,000 originally.

Moreover, the government's survey of households, which is separate from its payroll head count taken from businesses, showed a large rise in the labor force in August and an even greater gain in people who said they had found work. That explains the downtick in the jobless rate, from 6.8% to 6.7%, the lowest in two years.

The recent downtrend in first-time jobless claims suggests that, for August at least, the household survey tells the more accurate story. The weekly average of new filers in August dropped to the lowest level in any month during the past four years.

On balance, the claims data, the downtrend in joblessness, the contradictory household numbers, and the strength in hours and earnings suggest that the August dip in payrolls probably overstates the weakness in the labor markets and that payrolls in September are likely to show more bounce than they did last month.

To be sure, job growth during this recovery has been the slowest in any postwar upturn--a result that has injured the national psyche. But one characteristic of the labor markets--and of the recovery generally--is their tendency to move in fits and starts (chart).

That's what happened in March and June, when payroll gains slumped to 26,000 and 43,000, respectively. Those increases, like the August loss, are the statistical equivalent of no change. But sandwiched around those months were gains ranging from 200,000 to 300,000. The economy has generated 1.2 million jobs in 1993, and the total will come close to 2 million by yearend.

That's because continued gains in hours worked and take-home pay in August imply that the economy is on a firmer footing in the second half than the payroll losses might suggest. The U.S. workweek rose by 12 minutes last month, to 34.7 hours. That equaled the May reading, which was the longest in more than four years.

So despite the August job losses, total hours worked by all employees rose for the second consecutive month. That's a sign that, so far through the third quarter, economic activity is on the rise and that the economy is capable of posting growth of 3% or better this quarter.

The Federal Reserve's latest summary of economic activity from its 12 regional banks across the nation concludes that the economy continued to grow at a "slow to moderate" pace in late July and early August. At the same time, though, the report noted that corporate restructurings, including sizable layoffs, are "taking the bloom off employment growth."

Activity in the struggling manufacturing sector might also be a little livelier than the job numbers imply. The Fed reported that production and sales in manufacturing were increasing in many regions.

Factory workers have borne the brunt of the economy's job losses in recent years. Since 1989, manufacturing has shed 1.8 million workers, nearly 800,000 since the recovery began, including an additional 42,000 in August. Factory employment is now the lowest since 1965, and manufacturing's share of jobs has dwindled to only 16%, down from 20% in 1983 and from 26% in 1973.

But at the same time, the factory workweek rose by six minutes last month, to 41.5 hours. That equals the April level, which was the longest in 27 years. And factory overtime jumped from 4 hours to 4.2 hours, the most overtime in the postwar era. So in August, manufacturers appeared to be lifting their production for the second consecutive month, even as they continued to hand out more pink slips.

Another sign that manufacturers are getting busier is the July increase in unfilled orders other than aircraft (chart). While new bookings for aircraft and parts account for less than 3% of factory orders, unfilled aircraft orders make up more than 40% of the total backlog. The overall backlog has been in a steady decline this year, but excluding aircraft, unfilled orders rose in July.

On the surface, the 2.1% drop in new factory orders in July looked ominous. It was the largest decline in a year and a half. However, a 37% plunge in bookings for aircraft and parts, which had soared 53% in June, accounted for two-thirds of the month's overall loss.

The increase in unfilled orders other than aircraft, combined with longer work hours, suggests that many manufacturers are seeing firmer demand and the need to lift production. If so, factory job losses may well taper off in coming months.

Another positive aspect of the August job report was its implication for consumer income. Last month's longer workweek, combined with an increase in hourly pay, says that income continues to rise, laying the foundation for further gains in consumer spending and giving consumers the financial basis to expand their credit.

Households already saw their real aftertax incomes grow at an annual rate of 5.9% in the second quarter--much faster than the 3.2% pace of real consumer spending. Excluding a sharp drop in farm income in July, reflecting the floods in the Midwest and drought in the Southeast, real income started the third quarter well above the second-quarter level.

In August, income made further gains. Average hourly pay for production and nonsupervisory workers across the economy jumped 0.5%, to $10.87. So even despite the dip in payroll employment, the higher wage rate plus more work time means that average weekly earnings rose sharply, by 1%, to a record level.

Even though the yearly pace of hourly earnings has slowed, to 2.2% in the third quarter from 2.3% a year ago, the growth of weekly pay has actually picked up somewhat. In fact, this year, weekly pay has risen at an annual rate of 4.5%--well above the inflation rate (charts).

Moreover, hourly service pay is closing the gap with the higher pay of manufacturing jobs. The hourly wage rate in the private service sector stood at $10.20 in August, compared with $11.79 in manufacturing. And excluding relatively low-paying jobs in retailing, service pay averaged $11.38 last month.

Private services other than retailing have accounted for close to 80% of all job growth during the past year. That suggests that many of the new service-sector jobs that are being created during the recovery offer pay that is increasingly comparable to salaries in manufacturing.

The service sector has created all of the economy's new jobs this year, and that's the reason August employment looked so weak. After monthly gains averaging 180,000 through July, service-sector employment managed only a 15,000 increase in August. That advance is so far off the recent trend that September service jobs seem likely to bounce back strongly.

There is no question that U.S. workers continue to bear most of the burden of this frustratingly slow recovery, as companies try to stay competitive both at home and abroad by slimming down, cutting costs, and investing more in equipment than in people in an effort to boost productivity.

However, though they didn't grab the headlines, the details of the August employment report imply that the recovery is on solid ground and that future payroll figures are likely to look much stronger.

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