Job Loss Continues at Moderate, Steady Pace

MBA (7/7/2008 ) Velz, Orawin
Reports last week confirmed economic conditions evident over the past month: the economy has continued to expand but not at a pace fast enough to create jobs for those who seek them, causing the unemployment rate to trend up. It is being called a “growth recession.”
Nonfarm payrolls extended their six consecutive monthly drops, declining 62,000 in June. The Bureau of Labor Statistics revised employment downward in May and April a total of 52,000 jobs. Goods-producing industries continued to shed payrolls, totaling 69,000 jobs, including 43,000 in construction and 33,000 in manufacturing. Although the service industries added 7,000 jobs, the increase was only in the government sector. Payrolls in private service industries declined 22,000 after a 37,000 drop in May.

Mortgage industry employment saw the first month-to-month increase since February 2007, standing at 357,800 in May and edging up from 356,300 in April. (The Bureau of Labor Statistics releases some detailed categories of employment with a one-month lag.) Since its peak in February 2006, mortgage industry employment has declined about 29 percent, with the sharpest drops occurring in the two months following the August financial turmoil and modest declines since then.

The unemployment rate, calculated from a separate survey, remained at 5.5 percent. Unlike May, when the surge in job seekers, especially teenagers, caused the jump in the rate, June’s rate remained unchanged as both employment and the labor force declined.

Overall, the report continued to indicate a mild contraction in the labor market. The economy has shed, on average, 73,000 jobs a month since January, compared with an average monthly payroll cut of nearly 200,000 during the 2001 recession. According to a separate report from the Labor Department, weekly initial jobless claims jumped 16,000 to 404,000 for the week ending June 28 (only the second time since Hurricane Katrina that weekly initial claims exceeded 400,000), suggesting that job losses will likely continue in July.

Other reports last week were mixed. Residential construction spending continued to decline, but healthy nonresidential construction spending helped support overall construction spending. Factory orders rose modestly in June, as the value of nondurable goods shipments increased, largely from rising prices of petroleum product shipments. Manufacturing activity slightly improved in June, according to the Institute for Supply Management (ISM) Manufacturing Survey, which showed expanding manufacturing activity for the first time in five months. By contrast, the ISM Nonmanufacturing Index dropped sharply in June to the level indicating contracting service activities.

For now, the tax rebate checks have boosted consumer spending, especially for nondurable goods, helping to keep the economy growing. However, spending for nondurable goods saw three consecutive declines in May. A report on auto sales released last week suggested another decline in durable goods spending in June. Sales of light motor vehicles dropped in June to 13.6 million units (annualized pace), the slowest pace since 1993.

Consumers are tapped out as evident by deteriorating consumer credit quality. According to the American Bankers Association, home-equity lines of credit at least 30 days past due rose 14 basis points to 1.1 percent of accounts for the first quarter, the highest rate in 11 years. Delinquent credit-card accounts increased 13 basis points to 4.51 percent, the highest level since 2006.

Treasury yields remained low last week, helped by the flight to quality from tumbling stock markets. Record oil prices, which topped $145 a barrel on Thursday, financial market concerns and slow economic activity continued to weigh on stocks. The yield on the 10-year Treasury note stayed around 3.96 percent by mid-Thursday afternoon, three basis points lower than the rate on June 27. Fed funds futures indicated 80 percent odds that the Fed will keep the target rate at 2.0 percent when the Federal Open Market Committee meets next month.