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You can't always judge a book by its cover. Such is the case with today's
employment report. While the employment situation is certainly not yet strong, the April employment report contains important snippets that clearly paint a far better picture than the headlines do.
Take the payroll change, for instance. Payroll employment was reported up 43,000 in April after losses of 21,000 in March (revised from a positive 58,000) and 2,000 in February. When revisions are included, the current level of payroll employment is roughly 100,000 lower than was estimated. Nevertheless, the April gain was the largest since March 2001.
Moreover, the April gain would have been far greater if not for an unusually large drop of 79,000 construction employment. That decline was the result of a drop of 66,000 in employment of special trade contractors. Thus, if not for the decline in construction jobs, the job gain would have been far larger.
Construction Sector's Weakness
The drop in construction jobs could be attributed to recent weakening in nonresidential construction, which is down about 20% year-over-year. Residential construction, on the other hand, is up slightly compared with last year, owing to the strength of the housing market. (The S&P homebuilders index reached an all-time high Thursday, too.)
The weakness in nonresidential construction likely relates at least partly to the difficulty that developers have had in obtaining terrorism insurance for new buildings. The lack of terrorism insurance is said to have stymied large construction projects.
Although industry sources in real estate and insurance now say that terrorism insurance of up to $1 billion has become affordably available, it will take time for that availability to spur construction of new projects. Congress is now actively considering a terrorism insurance bill after months of inaction.
American Help-Wanted Signs
Outside of the construction sector, the U.S. was hiring. Proof of this is in the employment diffusion index, which measures the percentage of industries that hired workers during a given month. In April, 50.7% of industries hired workers vs. 45.0% in March and a low of 38.7% last November. The diffusion index is now at its highest level since March 2001.
This index is typically in the mid-50s during economic expansions, and it's moving steadily into that zone. The diffusion index for the manufacturing sector rose to 47.1 in April compared with 43.0 in March, and it's now at its highest level since July 2000. In fact, the diffusion index for the manufacturing sector is now above its 1999 average, a year when job growth averaged 257,000 per month.
One very important detail in today's report was the 66,000 rise in so-called help supply jobs, or temporary hiring. The increase was the third in a row and one of the largest on record, if not the largest. The gain follows an increase of 60,000 in March. That's important because temporary hiring tends to lead the hiring of permanent workers. Businesses rationally delay hiring permanent workers early in an expansion until they're confident in the expansion's sustainability.
Turning a Corner
Also important in the April report was the small decline posted in manufacturing jobs. In April, the beleaguered sector lost just 19,000 jobs, its smallest decline since October 2000. That stands in stark contrast to last year, when the sector lost about 109,000 jobs per month. A slowing in job losses in the manufacturing sector will have a significant impact on overall job growth.
Other signs of improvement in manufacturing-job conditions include another gain in manufacturing overtime, which increased to 4.3 hours from 4.2 hours in March. This leading indicator of employment is at its highest level since November 2000.
The jump in the jobless rate to 6.0% in April from 5.7% in March is undoubtedly due to the slow pace of job growth, but other factors almost certainly gave it a boost. In order for the jobless rate to at least hold steady, job growth must equal the normal growth of the labor force, roughly 150,000 per month (owing to population growth).
In other words, with 150,000 new people entering the job market every month, job growth of less than that increases the ranks of the unemployed. The current level of job growth is therefore too slow to prevent increases in the jobless rate.
But the sharp increase in April is probably partly attributable to the recent availability of extended unemployment benefits. More than 1 million people have filed for these benefits, and the extra three months of benefits may be producing a disincentive to aggressive job searches. This phenomenon
has already shown up in the weekly data on jobless claims.
One big reason for April's increase in the jobless rate was labor force growth, which surged by 565,000. Because household employment increased by a smaller amount (82,000), this forced the jobless rate upward, as 483,000 people (565,000 minus 82,000) said they entered the labor force but weren't employed in April.
Such a large jump probably won't be repeated in the coming months, thereby reducing the upper pressure on the jobless rate. Moreover, the labor force often increases when confidence in the job market improves. But it takes time, an average 15 weeks, for new entrants in the labor force to find a job.
Little Calm in Sight
To be sure, there's enough negativity in the employment report to sustain the market's increased pessimism on the economic outlook. The jobless rate, for example, won't sit well with the general public; it will almost certainly be at the top of the news headlines.
When Main Street hears that unemployment hit its highest level since 1994, that will create concern and thereby negatively impact consumer confidence and possibly spending. Moreover, the drop in the workweek, which fell to 34.12 hours from 34.2 hours in March, will reduce growth of personal income.
The markets will probably be somewhat forgiving of the lack of vigor in the employment data. Employment is a lagging indicator, after all. For example, the jobless rate didn't peak until 15 months after the last recession ended.
Nevertheless, given the pessimistic mood investors seem to be in these days, today's report will do little to calm anxieties, no matter what the details indicate.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. His first book,
The Strategic Bond Investor
, will be published in July by McGraw-Hill. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of
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