The Miserable Jobs Report Is More Confirmation The US Is Headed For Recession


The May jobs report was a complete and utter disaster for the economy and, perhaps, President Obama’s chances for reelection.

Employers created just 69,000 jobs last month, the labour Department said on Friday. That’s the fewest since May of last year.

Economists had been expecting nonfarm payrolls to increase by 150,000. (In fact, the result was lower than what any economist polled by Reuters had predicted.)

Moreover, companies added 49,000 fewer jobs than previously estimated in March and April. Talk about a slowdown.

The average monthly gain was 226,000 in first quarter vs. an average of just 73,000 in April and May.

Oh, and the U-3 unemployment rate rose to 8.2% from 8.1%. The broader U-6 gauge, which also measures underemployment, rose to 14.8% from 14.5%. The labour force participation rate did, finally, tick up to a still-low 63.8%, lending credence to the idea that the shrinking workforce reflects discouraged workers and not just demographics. The econ team at Barclays Capital sums things up nicely (bold for emphasis):

The May employment report suggests that the labour market recovery has lost significant steam in recent months. In our view, this raises the likelihood that the Fed will embark on a renewed round of policy easing, although market developments and the tone of other economic data in the coming weeks remain important. … In the establishment survey, payrolls rose just 69k, well below the 150k we and the consensus had expected and the weakest since May 2011.

The details were equally soft, not least the 38k downward revision to April (to 77k from 115k), which followed an eight-month sequence of upward revisions to the previous month. By sector, goods-producing firms cut 15k jobs, with a 12k rise in manufacturing more than offset by a 26k drop in construction. This can no longer be put down to weather effects to any significant degree so it would appear that construction employment prospects remain very weak …

The picture of lost momentum was also evident in hours worked data. The workweek fell one tenth to 34.4 hours and aggregate hours worked rose just 1.0% 3m/3m, down from 3.0% in April. … Bottom line: A clearly soft report that suggests a loss of momentum in the labour market recovery across jobs, hours worked and the unemployment rate.

So what is the true state of the labour market?

– If the size of the U.S. labour force as a share of the total population was the same as it was when Barack Obama took office—65.7% then vs. 63.8% today—the U-3 unemployment rate would be 10.9%. (Now, this doesn’t take into account the ageing of the Baby Boomers, which should lower the participation rate due to rising retirements. But is that still a valid assumption given the drop in wealth since 2006?)

–  If you take into account the ageing of the Baby Boomers, the participation rate should be trending lower. Indeed, it has been doing just that since 2000. Before the Great Recession, the Congressional Budget Office predicted what the participation rate would be in 2012, assuming such demographic changes. Using that number, the real unemployment rate would be 10.5%.

– Of course, the participation rate usually falls during recessions. Yet even if you discount for that and the ageing issue,the real unemployment rate would be 9.5%.

– We continue to be stuck in the longest period of 8% unemployment or higher since the Great Depression, 40 consecutive months.

– And, as the above chart shows — originally from Obama economists Christina Romer and Jared Bernstein in January 2009 –the current 8.2% unemployment rate is 2.5 percentage points above where Team Obama predicted it would be right now if Congress passed his trillion-dollar stimulus plan.

–  The median duration of unemployment rebounded to 20.1 weeks in May, and 42.8% were unemployed for longer than a half year.

– Total hours worked fell 0.2% on weakness in the work week.

– Average hourly earnings rose just 0.1%. Coupled with a very stable overall inflation rate, real wages were likely flat in May.

The big question now: Does this report suggest the U.S economy is heading into recession, especially given the sharp slowdown in global economic activity from Europe to India to, perhaps most worrisome, China?

Consider this: Last year, the U.S. grew at just a 1.7% pace. Research from the Federal Reserve finds that that since 1947 when year-over-year real GDP growth falls below 2 per cent, recession follows within a year 70 per cent of the time. We are firmly within the Recession Red Zone.

The political implications are clear: If the White House wasn’t already in a panic about the spring swoon, it sure is now. Another Recovery Bummer. If you punch in a mild recession into the higher regarded Fair-Yale forecasting model, Mitt Romney wins 53-47 over Obama in the two-party vote share. But given the example of Jimmy Carter, who suffered a mild recession in his 1980 reelection year, the Fair model might be underestimating the damage to Obama from a double dip.

UPDATE 1 (10:09 AM):  From Matt McDonald over at Hamilton Place Strategies:

Last month, the President only needed the economy to add 146,000 jobs per month to get the unemployment rate below 8 per cent if the labour force participation rate held steady, 250,000 if it returned to trend. With the bump in participation this month, the President now needs the economy to add 204,000 jobs per month if the labour force participation rate stays at 63.8 per cent and 295,000 if the participation rate continues to rise back to trend.

UPDATE 2 (10:13 AM): And a great jobs chart from HPS:

Update 3 (10:20 AM): Citigroup:

Signs of extraordinary and lasting weakness in U.S. labour markets have been evident since the start of the expansion, including the severe duration of unemployment for many job seekers (see figure 3). No doubt, today’s data will strengthen arguments for additional policy support for the recovery which might be desirable for reasons including the potential for “hysteresis” (reduce skills and employability) of the long term unemployed.

 UPDATE 4 (10:31 AM)From Calculated Risk:

Update 4 (11:00 AM):  Ominous analysis from JPMorgan:

The May jobs report was disappointing and demoralizing: employment increased only 69,000 and job growth the prior month was revised down substantially to 77,000. On top of that the average workweek fell a tenth to 34.4 hours and the trend in average wage growth appears to be slowing as well — all of which adds up to very slow growth in household labour income. The unemployment rate rose a tenth to 8.2%, though to be fair that aspect of the report isn’t quite as ugly as it appears insofar as it was pushed higher by an increase in re-entrants back into the labour force. Given the steady deterioration in labour market performance over the course of the year, our outlook for decent growth in the middle quarters of the year is now looking shopworn, and we will have forecast revisions out shortly.

Update 5 (11:05 AM): IHS Global Insight:

2012 is beginning to look horribly like 2011 – initial high hopes that the recovery was kicking into high gear, subsequently dashed.  … Although there is probably now some undershooting in seasonally sensitive sectors (for example in construction) after previous overshooting, the latest figures cast doubt on whether the economy has enough momentum to achieve even the 2.2% growth rate we had expected for this year. Given the uncertainties over the Eurozone crisis, emerging market growth, the US elections and the “fiscal cliff”, there are plenty of reasons for businesses to stay cautious in their hiring plans, even if surging gasoline prices are for the moment no longer on the list of things to worry about.

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