03/05/04

The employment situation report for the month of February is scheduled for release tomorrow morning at 8:30a.m. and fixed income investors world-wide are asking the question, will the real U.S. labor market please stand up! Indeed, a broad array of statistics that provide input on the nation's employment setting have at best been contractionary in nature, thus preventing firm conclusions about the labor market and how trends in this sector could affect the economy's overall growth potential.  

An excellent example of the diverse impressions forthcoming from available data are the household and establishment surveys vis-เ-vis ongoing job creation. Over the last twelve months, the household series indicates that 1.1 million individuals found new jobs, while the establishment survey captures a drop of 35,000 in total non-farm payrolls over the same time period. Needless to say, the difference is huge and clearly adds some uncertainty regarding the exact status of the U.S. labor force as calendar year 2004 moves forward. However, acknowledgement must be given to the fact that last month, Federal Reserve Board Chairman Alan Greenspan indicated that central bank officials viewed the payroll statistics as being a more legitimate referendum on hiring trends as compared to the household survey and, from that perspective, civilian employment totals, no matter how strong, may have little effect on interest rate trends. As is widely known, the January report was expected to reveal a surge in new hiring as the year got underway, with some "whisper numbers" envisioning an increase in non-farm payrolls at or above 300,000. The premise for such an optimistic assessment was that the seasonal adjustment process favored a sizeable gain in retail trade hiring, with that increase allegedly offsetting the unexpected weakness in this category over the final months of 2003. While that judgment proved reasonably correct, with retail trade adding 76,000 workers to payrolls, the rest of the service sector proved far weaker than anticipated, holding the overall increase in employment to just 112,000. Perhaps the biggest disappointment in the January data was the rollback in hiring at temporary help agencies, where 21,000 jobs were lost. Since this category is viewed as a leading indicator of employment trends, the retrenchment in January implied some softening in prevailing labor market conditions. At present, it appears as if most estimates for February payrolls are clustering in the area of 150,000 new jobs. If the consensus proves correct, the increase in monthly non-farms would be the largest since November, 2000. As usual, a great deal of scrutiny will be directed towards the manufacturing sector, where 42 consecutive monthly declines in employment have been recorded, with the total drop over this interval being placed at an incredible 3.0 million individuals. A continued shortfall in job creation in the manufacturing sector will resonate in the political theatre as Democratic Presidential candidates have focused on this issue on a campaign theme.

A great deal of media attention will be devoted to the nationwide unemployment rate, as this series is a labor market statistic that the public readily identifies with. There is little doubt that the recent pattern in this indicator has portrayed an improving labor market situation. In fact, June 2003 was the last month that the jobless rate actually increased and the current posting of 5.6% is 0.7% below the peak reading for the current cycle. One factor to be aware of is that some of the decline in this series has been related to a sizeable number of individuals leaving the workforce, a development that tends to lower the number of individuals that would be classified as being unemployed. At some point these individuals could come off the sidelines swamping the labor market and in turn giving an upward lift to the jobless rate. As a result, a rebound in February unemployment shouldn't be a total surprise. In terms of other inputs, the hourly earnings series will be followed closely as this wage measure has reflected a progressive diminution in income growth over recent quarters. While most forecasts are calling for an increase of four cents, over recent years, the February gain in earnings has usually been well above average, with the 2003 increase posting a hefty nine cents. The private workweek will also provide some insights on the economy's general performance during the opening months of the year. The two-tenths of an hour increase for January was strongest monthly gain in 1 1/2 years, but it still left the series at a level, 33.7 hours, that would be considered historically low.

William V. Sullivan, Jr.
Executive Director
212-762-6544