By Uric Dufrene
Sanders Chair in Business
Indiana University Southeast
There is one certainty about today’s employment report. There will be significant spin from both political parties. Both sides will have ample material to suit their argument because of both positive and negative results associated with the report. Here is why.
The unemployment rate declined to 7.8 percent, down from 8.1 percent in August, and the lowest since January 2009. The significant decline in the rate occurred because of an unusually large increase in the size of the labor force, and an even larger change in the number of employed. The labor force increased by 418,000 and the number of employed increased by 873,000.
As you can see from the graph below, the monthly change in employment is quite volatile, but the change in today’s report marks one of the highest month-over-month changes since 1993. Because of employment increasing at an amount that exceeds the change in the labor force, the number of unemployed also declined significantly, falling by 456,000.
Not all was rosy in the household component of the report however. The number of workers employed part time for economic reasons increased by 582,000, and the overwhelming majority of that number consisted of workers employed part-time due to slack work or business conditions.
Overall, the household component of today’s report was quite favorable. The unemployment rate saw a noticeable decline, and for good reasons. The labor force and the number of employed increased significantly, and the number of unemployed declined. The increase in the labor force resulted in the labor force participation rate increasing by a tenth of a point, to 63.6 percent, still quite low compared to historical levels. More impressively, the employment to population ratio increased from 58.3 percent to 58.7 percent.
The establishment survey component of the report was not as impressive. Payrolls increased by 114,000, with private sector payrolls only increasing by 104,000. Goods producing sectors saw an overall decline in payrolls, and service sectors increased. Education and health services showed the largest increase, registering a gain of 49,000 payrolls.
Perhaps more significant for both Indiana and Kentucky was the decline in the number of manufacturing jobs. Manufacturing payrolls declined by 16,000, with 13,000 of these losses occurring in durable goods. With the exception of the latest ISM Report on Business, most manufacturing indicators have been pointing to a slowdown, and today’s manufacturing payroll number is consistent with that cooling.
Manufacturing has been one of the bright spots for both Indiana and Kentucky. Much of this has been driven by growth in the automotive sector, and manufacturing has been responsible for significant job gains following the recession. Any downturn in manufacturing will affect the labor markets of both states, and today’s manufacturing payroll number was not a positive sign.
A couple of manufacturing indicators are of interest to both Kentucky and Indiana economies, and present conflicting signals regarding overall payroll growth in both states. First, durable goods have been shown to be an early indicator of turning points in the national economy, and move in conjunction with Kentucky and Indiana payrolls. The last durables goods orders report showed a significant decline in new orders, and as the graph below shows, a divergence between durable goods and Indiana and Kentucky payrolls is occurring.
Durable goods have been on a downward trend since the beginning of the year, but year over year payroll gains for both states have been on a steady rise. The question is whether durable goods will turn up, and follow payroll growth of both states or will payrolls begin to decelerate, in line with durable goods trends. Today’s national manufacturing payrolls suggest that that manufacturing payrolls might ease. Due to the contribution to the payroll growth of both states, overall payroll growth in both states may begin to ease somewhat.
On the bright side in manufacturing, the closely watched ISM gauge on manufacturing moved past 50 this week, signaling expansion once again. Given the bad news associated with the last durables goods report, the ISM number was one to celebrate. This was the first time the Index came in above 50 since July. As the graph below shows, this has significance for both Indiana and Kentucky as the payrolls of both states track closely with the ISM number. Will the ISM number continue to move upward, consistent with Kentucky and Indiana payroll growth, or will we see a deceleration in payrolls of both states, somewhat consistent with the historical relationship between payrolls and the ISM?
Today’s 7.8 percent headline number will provide a boost to consumer confidence, which is a key to increasing overall domestic demand. Stronger demand is necessary to increase payroll growth beyond the weak level observed in today’s report. Additionally, a declining unemployment rate will support the overall housing market, and this will provide a boost to GDP. It will take some time for this to transmit to the housing economy, but a rate under 8 percent is a start.