By Uric Dufrene
Monthly jobs numbers were released today, and the report showed continued softening in the nation’s labor market. The unemployment rate declined to 8.1 percent, but this was driven by a significant drop in the labor force. The nation’s labor force declined by 342,000, and the number of employed declined by 169,000. This suggests that the decline in the unemployment rate was not due to a favorable combination of a rising labor force and increasing employment.
The report also showed declines in the labor participation rate and the employment to population ratio. The labor participation rate of 63.6 percent is lower than last year’s number of 64.2 percent, and the employment to population ratio of 58.4 percent is identical to last April’s number. Both numbers showed a decline from March to April. Combined, these numbers suggest that the labor market recovery is beginning to struggle. These weak household numbers will continue to place headwinds on household income, a key indicator for stronger domestic demand through personal spending.
The consensus estimate on nonfarm payrolls was around 160,000, but the Bureau of Labor Statistics indicated that the nation added only 115,000 jobs last month. The weaker number is consistent with some of the soft economic data recently released.
Manufacturing showed the weakest gain since November of last year: 16,000 jobs were added in manufacturing, with 15,000 of those positions occurring in durable goods. This week’s Institute of Supply Management manufacturing indicator was better than expected, but regional Federal Reserve indicators have been pointing to a deceleration in manufacturing. Recent reports on durable goods and factory orders were also weak. For the region’s economy and both Kentucky and Indiana, manufacturing will continue to be a wild card regarding the overall outlook. A slowdown in the nation’s manufacturing sector will show up in weaker nonfarm payroll numbers for the region and the Kentucky and Indiana economies.
Retail trade numbers were quite favorable in today’s report: 29,300 jobs were added, reversing declines in the two previous months. General merchandise stores led the increase for overall retail trade, adding 21,400 jobs. Even though some of the personal income numbers have been relatively weak, consumer spending has been somewhat resilient. Today’s jobs report will not provide a significant boost to subsequent personal spending.
Transportation and warehousing showed a decline of 16,600 positions. Most of these declines occurred in transit and ground passenger transportation, but the overall weak number does not suggest that the economy is heating up.
On the bright side, professional and business services added 62,000 positions, with a large chunk of these positions occurring in temporary labor services. A strong number in professional and business services is consistent with subsequent gains in overall hiring. However, the consistently strong gains in temporary labor services suggest that employers continue to have leeway in hiring temporary versus permanent employees.
Yesterday’s unemployment claims number declined by 27,000, a much needed reversal. Claims were again approaching the 400,000 level, and yesterday’s decline placed initial claims back to 365,000. The weekly number is quite volatile. So a few more weeks of data will be necessary to identify the underlying trend, but yesterday’s number did provide an early clue that the labor market soft patch could be ending. If weekly claims continue to fall over the next 3 weeks, next month’s employment numbers will be stronger than today’s report.
While this week’s ISM Manufacturing Index was stronger than expected, the ISM Non-Manufacturing Index came in much weaker than expected. The consensus estimate was around 56, and the actual number came in at 53.5. Any number under 50 implies contraction in the service economy, by far the largest component of the U.S. economy.
While there have been some bright spots in U.S. economic numbers, the data are getting increasingly negative. Today’s decline in the unemployment rate is not necessarily positive because it was driven by a significant drop in the labor force and a decline in employment. A robust economic recovery should be showing the opposite.