March
Job Report Disappoints, but Labor Market Continues to Heal
The
March employment report, released on Friday, April 6, 2012, was a
disappointment relative to both expectations and the labor market data in
recent months. Some of the disappointment in March 2012 may have been “payback”
for a much warmer-than-usual winter. On balance, however, the report and its
underlying details suggest that the labor market continues to heal, but it
still has a long way to go to get back to normal. The lackluster March jobs
report also puts another round of quantitative easing (QE) back on the table
for the Federal Reserve (Fed).
The
March employment report revealed that the economy added 121,000 private sector
jobs in March, far fewer than the consensus expectation of 215,000, and well
below the 250,000 jobs created on average in the three months ending in
February 2012. In fact, the result was below the lower end of the range of
consensus expectations (+185,000 to +265,000). This has happened in just nine
of the 63 months since early 2007. Despite the disappointment, there were some
bright spots in the report, including the drop in the unemployment rate to 8.2%
from 8.3% in February. The financial markets initially reacted poorly to the
data. However, the March jobs report does little to change our view that the
U.S. labor market is healing, albeit slowly, but still has a long way to go to
recoup all of the jobs lost during the Great Recession.
Behind
the unambiguously disappointing headline job count, there were several bright
spots in the March jobs report.
· With
the 120,000 gain in March, the economy has now added jobs in each of the past
25 months, the longest such streak since mid-2005 through mid-2007.
· The
diffusion index — the number of industries adding workers less the number of
industries shedding workers — stood at a robust 67.9% in March, and averaged
68% in the first quarter of 2012, one of the highest readings in 20 years.
· The
manufacturing sector added 37,000 jobs in March 2012, the 16th time in the last
17 months that manufacturing jobs have increased. Q1 marked the third best
quarter (Q3 1987 and Q4 1997) for manufacturing employment since the middle of
1984.
· State
and local government employment, which has been a significant drag on overall
employment for almost four years, may be stabilizing. State and local
government employment fell just 1,000 between February and March 2012, but
actually increased by 14,000 in the first quarter of 2012, the first quarterly
gain in nearly four years. In 2011, state and local governments shed more than
20,000 jobs per month, and shed more than 650,000 jobs since August 2008, as
they struggled to align costs with reduced revenues. Looking ahead, the recent
data from this report, as well as from state and local government budgets and
from surveys of layoffs in state and local governments, all suggest that the
worst may be over for job losses at the state and local government level.
· The
private sector economy created more jobs (635,000) in the first quarter of 2012
— or 212,000 per month — than in any quarter since the first quarter of 2006,
when the economy, as measured by real Gross Domestic Product (GDP), was growing
at 5.1%. While some of the increase in jobs was likely due to warmer-than-usual
weather during the quarter, the vast majority of the jobs created recently
likely represent actual economic activity. Weather-sensitive jobs excluding
construction (Retail, Transportation & Warehousing, Services to Buildings
and Dwellings, and Leisure & Hospitality) rose just 24,000 in March 2012
after the 26,000 gain in February. This metric posted an average gain of over
100,000 per month in the three months ended in January 2012. In short, the
212,000 jobs created on average, per month, in the first quarter is probably
closer to the underlying trend of job growth than the 250,000 or so jobs added
in the three months ending in February 2012, which were likely boosted by the
warmer-than-usual winter.
Between
February 2008 and February 2010 — during and immediately after the Great
Recession — the economy shed 8.9 million private sector jobs. Since February
2010, the economy has added 4.1 million private sector jobs. Thus, the economy
still needs to add 4.8 million jobs to recoup all the jobs lost during the
Great Recession. If the economy creates private sector jobs at the pace it did
during the first quarter (210,000 per month), it would take until the beginning
of 2014 (another 22 months) for the economy to get back to peak employment. As
we have noted in previous commentaries, many of the jobs lost during the
downturn (Construction, Financial Services, and Real Estate) may never come
back. But as of the end of January 2012, there were over 3.4 million open jobs
in the economy (Please see the April 3, 2012 Weekly Economic Commentary for
more details).
We
often get asked about the “quality” of the jobs being added each month. What
are the workers being paid? Are the jobs full-time or part-time? Our answer to
that question is simply that the best gauge of the labor market may not be the
jobs report at all, but rather the personal income and personal spending report
that comes out three weeks after the monthly jobs report is released. In that
report (the March 2012 personal income and spending report is due out on April
30, 2012) the personal income data, which basically adds up all the income made
throughout the economy, is key. Personal income — which includes income from
wages and salaries, but also from rental income, interest received and transfer
payments (social security, unemployment insurance, Medicare payments, etc.)
from the government — provides the buying power for personal spending, which in
turn accounts for two-thirds of GDP.
Recently,
personal income growth has been running about 3% above its year-ago levels, a
big improvement versus the 3 – 4% year-over-year declines during the Great
Recession, but still far below the “normal” pace of income gains (5 – 7%).
Compensation of employees, which accounts for about two-thirds of personal
income, and is a good proxy for employment growth, is running about 4% above
year-ago levels. This takes into account that in recent months, about 19% of
the jobs in the economy are part-time jobs. During the 2001 – 2007 economic
expansion, only 17 – 18% of jobs in the economy were part-time jobs. Presented
another way, in March 2012, 81% of the jobs in the economy were full-time jobs,
and just 19% were part-time jobs. The economy has added 2.7 million full-time
jobs over the past year, and shed 233,000 part-time jobs. As recently as June
2012, the economy was still shedding full-time jobs (621,000 in the 12 months
ending in June 2011), and adding part-time jobs (878,000 in the 12 months
ending June 2011). Thus, despite the disappointment in March 2012 relative to
expectations, the labor market today is far stronger than it was in the middle
of 2011, but still not booming.
While
Fed policymakers are likely to take note of all of these crosscurrents in the
latest employment report, their key takeaway is likely to be similar to ours:
the labor market is healing and is probably in better shape than it was last
summer, but the economy is probably not growing quickly enough to generate more
than 200,000 – 225,000 jobs per month. Is job growth at that pace enough to
convince Fed policymakers that the economy does not need another round of QE?
In our view, probably not, and the conversation in the marketplace about QE3
will likely heat up in the coming weeks. Although we do not expect the Fed to
announce QE3 at the next Federal Open Market Committee (FOMC) meeting (April
25), it is likely to be discussed, and it could be introduced as soon as the
FOMC meeting in late June. Please see our Weekly Economic Commentary from March
13, 2012 for our insights into what another round of quantitative easing from
the Fed might look like.
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securities).
Quantitative Easing
is a government monetary policy occasionally used to increase the money supply
by buying government securities or other securities from the market.
Quantitative easing increases the money supply by flooding financial
institutions with capital in an effort to promote increased lending and
liquidity.
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