Thursday, March 03, 2011

Employment Situation Preview: Some Improvement, but Still Grim

by Calculated Risk on 3/03/2011 01:00:00 PM

Tomorrow the BLS will release the February Employment Situation Summary at 8:30 AM ET. The consensus is for an increase of 179,000 payroll jobs in February, and for the unemployment rate to increase slightly to 9.1% (from 9.0% in January).

Two quick comments and then a review of recent data:
• Remember that the weak payroll report in January (only 36,000 jobs added) was blamed on the snow. Usually I don't buy the weather excuse, but it did appear weather played a role this time. If there is a bounce back, it will be useful to average the last two months together to estimate the current pace of payroll growth. If there is no bounce back - that would definitely be bad news.

• Even if the payroll report shows improvement, the employment situation remains grim. There are 7.7 million fewer payroll jobs now than before the recession started in 2007 with almost 14 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.2 million have been unemployed for six months or more.

So, while the report tomorrow will hopefully suggest “improvement”, many of the unemployed and marginally employed will not see it, at least not yet, and probably not for some time.

Here is a look at a few of the recent employment related reports:

• The ISM non-manufacturing (service) employment index increased to 55.6 in February, up from 54.5 in January.

ISM Service Index and EmploymentClick on graph for larger image in graph gallery.

This graph shows the relationship between the ISM non-manufacturing employment index and the change in BLS private service employment (as a percent of the previous month employment).

There is plenty of noise (R-squared is 0.68), but a reading of 55.6 suggests a fairly strong increase in service sector employment (blue dot on graph). This is about a 0.23% increase or around 200,000 service sector jobs.

• The ISM manufacturing employment index increased to 64.5 in February, up from 61.7 in January. This was the highest level since January 1973, however manufacturing employment is a much smaller percentage of overall U.S. employment now - so the impact on overall employment is less.

ISM Manufacturing Index and EmploymentThis graph shows the relationship between the ISM manufacturing employment index and the change in BLS manufacturing employment (as a percent of the previous month employment).

The two yellow dots are for January 2011 (61.7 ISM and 49,000 jobs), and a forecast for February based on the ISM employment reading of 64.5. The ISM survey suggests manufacturing employment grew close to 60,000 in February.

• ADP reported Private Employment increased by 217,000 from January to February on a seasonally adjusted basis, and has averaged 217,000 over the last three months.

Weekly Unemployment Claims• Weekly initial unemployment claims were down significantly in February.

This graph shows the 4-week moving average of weekly claims for the last 40 years.

The average in February was 388,500 initial claims per week, down sharply from the October average of 456,000.

• All of the Regional Fed manufacturing surveys reported employment expansion in February.

• The Federal Reserve’s “Beige Book” reported that "Labor market conditions continued to strengthen modestly, with all Districts reporting some degree of improvement."

• Consumer Sentiment increased in February (frequently coincident with improvements in the labor market). The final February Reuters / University of Michigan consumer sentiment index increased to 77.5, the highest level in three years.

• However on unemployment: Gallup Finds U.S. Unemployment Hitting 10.3% in February NOTE: The Gallup poll results are Not Seasonally Adjusted (NSA), so use with caution. But this does suggest a much larger increase in the unemployment rate than the consensus.

My guess is we see the opposite of January when payroll employment was weak, but the unemployment rate dropped sharply. I expect payroll employment was up sharply in February, but the unemployment rate probably increased too.