Vital Signs: Is the Labor Market Nearing a Bottom?

As far as top economic reports go, this week will be all labor markets, all the time. Recent data, ranging from consumer spending and confidence to housing starts and sales, have held out hints that the worst of the recession has past, and that a move toward stabilization is now in progress. The job markets will be a crucial part of that scenario, but so far they have not yet joined the recent parade of hopeful data. This week will offer some key updates on how the labor markets are faring.

In particular, weekly unemployment claims are now taking on an increasingly important role in the outlooks for both the job market and the broader economy. In the week ended Apr. 25, the four-week average of new claims declined for the third week in a row. If claims have indeed topped out, that would be a very strong recovery signal. New claims typically begin to fall about the same time recessions are bottoming out. Plus, a lower level of claims would foreshadow smaller declines in monthly payrolls.

Given past sharp cuts in payrolls, it’s clear that businesses are keeping tight reins on their labor costs. In the first quarter, the employment cost index, a measure of hourly pay and benefits, increased only 2.1% from a year ago, the lowest annual growth on record. Companies are also trying to keep their productivity from slipping. So far, they are doing a much better job of that than in recessions prior to this decade. Those efforts should be on display in the Labor Dept.’s report on first-quarter productivity.

Productivity, or output per hour worked, most likely held about steady last quarter, similar to the showing in the fourth quarter. We know from the latest data on gross domestic product that output in the nonfarm business sector fell by a steep 8.2%, and monthly data show that hours worked plunged by an even greater 8.7%. That mix should yield little if any productivity gain. However, productivity typically falls in a recession, especially in severe downturns like this one. As a result, businesses are holding the line on their unit labor costs, which is helping to limit the recession’s damage to their profit margins.

All this leads up to what will likely be the week’s top economic news, the Labor Dept.’s employment report for April. The weekly claims data suggest the month’s payroll loss is unlikely to be significantly worse than in recent months. Economists expect a decline of 635,000, less than the 685,000 monthly average during the first quarter. They also look for the unemployment rate to jump another 0.3 percentage points to 8.8%. Over the prior half year, monthly increases in the jobless rate have averaged 0.4 percentage points.

However, it’s only natural to see the largest monthly rises in the unemployment rate during the deepest declines in GDP. If the weekly data on first-time jobless claims have peaked, and if the pace of the economy’s contraction is slowing, then increases in the jobless rate will most likely begin to get smaller this summer. Of course, those are still two very big "ifs."

Here’s the weekly economic calendar, from Action Economics:

Top Economic Reports
Report Date Time For Median Estimate Last Period
Construction Spending Monday, May 4 10:00 a.m. March -1.5% -0.9%
ISM Nonmanufacturing Index Tuesday, May 5 10:00 a.m. April 42.0 40.8
Nonfarm Productivity (Preliminary) Thursday, May 7 8:30 a.m. Q1 1.0% -0.4%
Unit Labor Costs (Preliminary) Thursday, May 7 8:30 a.m. Q1 2.4% 5.7%
Consumer Credit ($Billions) Thursday, May 7 3:00 p.m. March -$4.0 -$7.5
Nonfarm Payrolls (Thousands) Friday, May 8 8:30 a.m. April -635 -663
Manufacturing Payrolls (Thousands) Friday, May 8 8:30 a.m. April -160 -161
Unemployment Rate Friday, May 8 8:30 a.m. April 8.8% 8.5%
Average Hourly Earnings Friday, May 8 8:30 a.m. April 0.2% 0.2%
Average Weekly Hours Worked Friday, May 8 8:30 a.m. April 33.2 33.2
Wholesale Trade Sales Friday, May 8 8:30 a.m. March 0.1% 0.6%
Other Reports and Events
Report/ Event Date Time For
Pending Home Sales Monday, May 4 10:00 a.m. March
SPEECH: Kansas City Fed President Hoenig Monday, May 4 12:30 p.m.
ICSC-UBS Store Sales Tuesday, May 5 7:45 a.m. Apr. 28-May 2
Johnson Redbook Weekly Store Sales Tuesday, May 5 8:55 a.m. Apr. 28-May 2
SPEECH: Fed Chairman Bernanke Tuesday, May 5 10:00 a.m.
SPEECH: Minneapolis Fed President Stern Tuesday, May 5 1:15 p.m.
SPEECH: San Francisco Fed President Yellen Tuesday, May 5 10:30 p.m.
Mortgage Applications Wednesday, May 6 7:00 a.m. Apr. 28-May 2
ADP Employment Report Wednesday, May 6 8:15 a.m. April
SPEECH: San Francisco Fed President Yellen Wednesday, May 6 5:30 p.m.
Initial Unemployment Claims Thursday, May 7 8:30 a.m. Apr. 28-May 2
SPEECH: Chicago Fed President Evans Thursday, May 7 9:15 a.m.
SPEECH: Fed Chairman Bernanke Thursday, May 7 9:30 a.m.
SPEECH: Richmond Fed President Lacker Friday, May 8 1:00 p.m.
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