Round and Round
Last week's employment report from the Department of Labor showing an increase of 143,000 jobs shocked most economists. However, the majority of the jobs created were more of massaging. Since retailers normally hire seasonal help during December and lets the workers go in January. The Department of Labor adjusts the employment data that takes this in account so the seasonal hiring washes out. This year, however, retailers did not hire nearly the same number of workers as in the pasts. This caused the December employment report to be much worse than expected, losing 101,000 workers instead of gaining 20,000 economists expected. This was mostly reversed in January, since there were not as many seasonal workers to let go after the holiday season. This seasonal adjustment has led most economists have dismissed the positive tone of January's employment report. The poor employment environment can been seen by looking at the year-over-year comparisons. Since September 2001, each month has seen lower employment levels than the year ago period.
Adding to the dismal employment outlook was last week's layoff report from Challenger, Gray & Christmas. The outplacement firm reported 132,222 layoffs were announced in January. This was up from 92,917 in December. Interestingly, the retail sector showed the most announced layoffs, 44,087, or about one-third of all layoffs. This might show the just how unrealistic the Department of Labor's employment report was, which showed 101,000 new jobs.
Unfortunately, most economists think job growth is necessary for the economy to pick up. And while everyone is excited about the recent pickup in the manufacturing sector, the employment picture in manufacturing has not among manufacturers remain close to record lows.
There have been several surveys showing that the manufacturing sector is starting to recover. Last week the Institute for Supply Management (ISM) reported its diffusion index at 53.9. It has been above 50 for eleven months out of the past year. However, the employment component remained below 50 (47.6) for the 28th straight month. The Richmond Fed Manufacturing Survey is another pointing to a recovery in the beleaguered manufacturing sector. It also showed a decline in the number of workers. The Richmond Fed survey was also interesting in that, the prices paid continue to rise faster than prices received. This is similar to the manufacturing survey out of the Kansas City Fed as well.
The service sector has also been very lackluster. The ISM non-manufacturing survey reported that the employment component finally showed expansion after spending 22 months below the magical 50 level. With that said, there is not much to get excited about. The employment index was 50.3 and with most of the gain coming from a decrease in the number of respondents forecasting employment will be lower, 15% opposed to 22% in December. The percent of respondents increasing their workforce actually dropped. Only 12% expect to expand their payrolls versus 14% in December. I'm not real sure how a diffusion index gets a reading of 50.3 when 12% are positive, 15% are negative and 73% are neutral. I guess that is why I'm not a professional economist.
Labor cost are continuing to increase driven by soaring healthcare benefit costs. According to the U.S. Camber of Commerce, benefits costs averaged 39% of total payroll cost in 2001, up from 37.5 in 2000. Note this was for 2001, and with the continuing surge in healthcare premiums this percent is likely higher.
Maybe worth throwing out is a new survey from Gallup and UBS. The Employee Outlook Index, which measures employee sentiment, fell 6 points to 60 in January. The index was started in April 2002, so there is not much history to it, but its low point was last August at 58. The job security index fell 2 points to 42. If employees are becoming less confident about the labor market, and with corporate America focusing on controlling cost, wage growth could slow as employees are just thankful to be employed.
One of the bright spots in the labor market this year has government hiring. During 2002, local governments added 175,000 jobs. State government payrolls declined by 8,000 workers and the federal government added 229,000. The employment picture for state and local governments is turning for the worse. Record budget deficits are causing state and local government to dramatically cut expenses. The Wall Street Journal reported this week, that eight states have initiated layoffs this year. The article mentioned that Adrian Moore, vice president of research at Reason Public Policy Institute, forecasts that 150,000 state and local government employees could lose their jobs over the next several years. Considering the states have a $90 billion budget gap, and local governments are also having budget problems, this estimate might prove optimistic.
Not only are workers continuing to lose jobs, it is taking longer to find a new job. Within the January Employment Situation report, the Department of Labor reported that the average duration of unemployment is 18.4 weeks. While unchanged from December, it is almost 4 weeks longer than January 2002. During the early 90s recession it got as high as 19.4 and was up to 21.2 in 1983.
With companies focusing on the bottom line, end demand will have to pickup before companies increase their payrolls. After propping up the economy for the past two years, consumers are starting to weaken and most measures of consumer confidence are recording multi-year lows. This obviously does not bode well for an imminent improvement in employment.
Wal-Mart announced its sales were less than expected last week along with Federated Department stores. Wal-Mart and Federated had plenty of company in reporting same-store sales below plan.
The Bank of Tokyo-Mitsubishi chain store sales index was unchanged versus last week and up only 0.6% year-over-year. This was the lowest year-over-year growth since the second week of July 2001, and the comparisons get tougher in the months ahead.
During 2000 and 2001, companies would report that their outlook was "cloudy." Reality was that companies had a perfectly good outlook, it just was not favorable. Now, companies are hoping the "cloudiness" is due to the Iraq situation. Unfortunately, the outlook is poor because end-demand is weakening. Companies hope demand will resurface after the Iraqi war is over, but it is very likely that end-demand is diminishing simply because consumers are retrenching. Without end-demand rising, it will be difficult to spur meaningful job growth. Without job growth, economists don't expect the economy to meaningfully recover. So round and round we go.