Jobs: A February Cooling Trend?
It looks like U.S. job growth slowed last month—it's just not clear by how much. In the government's February employment report for the month scheduled for release Mar. 9, we at Action Economics peg February nonfarm payroll growth at only 90,000; market forecasts range as low as 25,000 and as high as 165,000.
Nonetheless, all these estimates lie below the 2006 average gain of 187,000, as the uptrend in weekly jobless claims, poor weather, and the current inventory correction are all throttling market forecasts, and leaving room for a likely subpar performance for the February jobs report.
Merely a Cold Spell?
The market is braced for a weak figure, but with weather as a likely driver of the poor performance that will make the implications of the numbers for the economy difficult to decipher. The data will be analyzed for clues that weather is indeed the culprit behind any weakness that materializes.
The big swing should add to the mix of factors driving market volatility over the past two weeks, even if the report ultimately provides little clarity on the trajectory for the economy. The wage figures will also enter the mix, as persistent evidence of mounting labor costs, as shown in the fourth-quarter productivity report, will remain a constant thorn in the side for the Fed.
Here are the factors that helped us put together our forecast for February:
There are four industries that accounted for the bulk of the perceived slowdown in job growth in 2006:
Retail employment lost 42,000 jobs in 2006, compared to adding 228,000 jobs in 2005 and 197,000 jobs in 2004. We expect retail employment to remain lean in 2007.
Manufacturing payrolls lost 84,000 jobs in 2006. This was very similar to the 83,000 jobs lost in 2005, though both years were worse than the net 4,000 job reduction in 2004.
Construction employment rose by 143,000 jobs in 2006 compared to a 419,000 job gain in 2005 and a 312,000 job gain in 2004. Jobs growth for construction remained surprisingly resilient in 2006 despite a downtrend that weighed on payrolls, and started 2007 with a big 22,000 January pop. This gain will be sharply reversed in February, as bad weather will likely hit the sector hard.
The bellwether "temp" employment series lost 7,000 jobs in 2006 compared to adding 212,000 in 2005 and 135,000 in 2004. Temp job loses were feared to signal future job losses elsewhere, yet the weakness likely reflected a move toward permanent from temporary job hiring, and hence was not a leading indicator of reduced job creation.
Outside these four industries, average monthly job growth actually accelerated in 2006 from the pace in 2004 and 2005, with average monthly gains of 186,000 in 2006, compared to 147,000 in 2005 and 119,000 in 2004.
The household survey
The household measure of job growth (used to derive the unemployment rate) revealed an average monthly job gain of 262,000 in 2006 vs. 219,000 in 2005, and 144,000 in 2004. As we frequently note, the household survey is less subject to annual revisions, though it is more volatile on a monthly basis, hence providing a good indicator of eventual payroll revisions when divergences extend over long periods.
But, similar to the residual in payrolls excluding the four weak industries cited above, we saw a notable slowdown in job growth in January in the household employment measure—with job growth of just 31,000. This weakness has raised the ante for February to show a bounce back in line with the 240,000 average gain of the last two years. A bounce would alleviate concerns that the gross domestic product growth moderation over the last year is finally weighing on job growth.
Wage growth on a year-over-year basis has risen substantially since the start of 2004, though a surge in year-over-year growth to a 4.3% cyclical peak in April of last year was followed by a sideways trend, with the peak only re-tested once again in December, before a drop-back to 3.9% in January.
Nominal earnings growth is at near two-decade highs, and the drop in headline inflation in the second half of 2006 has allowed real earnings to catch up.
As long as labor markets remain tight and headline inflation remains contained, real earnings will continue to post solid gains that will fuel spending.
Forecasts and revisions
Median payroll forecasts moved lower in the second half of 2006 with mounting fears of a sharp slowdown. The average median forecast was 124,000 in the second half of the year, vs. 197,000 in the first-half. This drop is partly due to the "as-reported" figures notably undershooting the median in seven out of the eight months ending in October—by an average of 50,000. However, big subsequent upward revisions have left the average payroll gains in the second half of 2006 at 186,000—well up from the 114,000 "as-reported" average—and essentially unchanged from the 188,000 average gain in the first half of the year.
Historically, January by far has the most job attrition of any month in the year, whereas February through June represents a time of seasonal strength.
Given the poor weather in much of the country that managed to extend throughout nearly the entire month, the market will take a close look at the "not at work because of weather" series to try to better gauge any weather distortions.
Other job-market indicators
The February ADP Employment Survey reading of 57,000 translates to an 87,000 gain in nonfarm payrolls, given our assumption of a 16,000 government job gain and a 14,000 downward bias to the new ADP data.
Weekly initial jobless claims through late February have a hefty month-average reading of 339,000, following a lean 306,000 January average, and averages of 316,000 for December, and 327,000 for November. Similarly, continuing claims have recently hit the highest level since December, 2005. Although the jump in the weekly jobless claims series is likely weather-related, it still suggests relative weakness for the payroll report.
The current-conditions series from University of Michigan's consumer sentiment and the Conference Board's consumer confidence indexes revealed a notable divergence in February. The Michigan current series dropped to 106.7 from 111.3, while the Conference Board current series jumped to 139.0 from 133.9, with the implied "job strength" sub-component hitting a new cycle high.
The employment components from the factory sentiment surveys generally bounced in February, although they continue to sit at restrained levels relative to recent years. As for the service sector, the non-manufacturing ISM employment component climbed to 52.2 from 51.7.