A flurry of conditionals has couched their "flickers of hope" and "green shoots," but government officials may finally have their chance to speak with unobscured optimism. The Labor Department reported Friday that employers cut 345,000 jobs from their payrolls last month, a bad sign in nearly any economy but this one, where average job losses have been twice that for the past six months. The losses reported are a full third less than economists had expected. Even job losses for the past two months were revised down by a total of 82,000 jobs. The unemployment rate, meanwhile, skipped higher to hit 9.4 percent for the month.
Tell me the bad news first. May brought yet another wave of steep job losses in the manufacturing sector. There were 30,000 jobs lost in the motor vehicles and parts industry alone. That industry has now seen employment drop by half since its peak in 2000.
The average workweek is still on the decline, suggesting that cost-cutting employers may have slowed their job shedding but continued to slash their employees' hours. Indeed, more than half of employers surveyed last month by outplacement firm Challenger, Gray & Christmas reported using cost-containment strategies such as cutting salaries and wages, while a smaller percentage were cutting staff.
What were the best parts? There were many bright spots in the report. Job losses moderated considerably in construction, retail, and professional and business services. Payroll cuts in temporary help services dropped about 90 percent from their six-month average—many economists view temp services employment as a leading indicator of the direction of the economy. Even in leisure and hospitality the news was good, as employment stayed flat for the month, after averaging 39,000 job cuts a month for the past six months.
Why did the unemployment rate rise to 9.4 percent? There's no question the job market continues to be fairly dismal. The good news is not that employers are adding jobs but that they're cutting them less vigorously. The number of unemployed workers has jumped by 7 million since the start of the recession in December 2007, and there are nearly 4 million workers who have been unemployed for 27 weeks or more.
However, a significant part of the reason for the sizable increase in the unemployment rate is the rising number of Americans who are identifying themselves as active job seekers and members of the labor force—both employed and unemployed. In fact, the labor force grew by 350,000 last month, and the labor force participation rate (the percentage of working-age Americans who are working or looking for work) is increasing.
What can we expect in the future? Job losses will likely continue to moderate, although most economists expect the unemployment rate will peak above 10 percent sometime later in the year. Employment will probably not bounce back in all sectors—or all states—evenly. According to IHS Global Insight, states such as Texas, Oklahoma, and Utah will be the quickest to recover, while Rust Belt states of Michigan, Ohio, and Indiana may take years to bounce back.
What are the experts saying?
"Despite what is a moderating pace of layoffs, there are telling signs that those currently unemployed are having, and will continue to have, increasing difficulty finding work. The mean duration of unemployment rose to 22.5 weeks, while the median duration rose to 14.9 weeks. Moreover, as of May, 52.9 percent of the unemployed are so because they have lost their jobs permanently (see second chart below), the highest figure in the life of the data. This is one sign that the current recession has generated a considerable degree of structural, as opposed to cyclical, unemployment, reflecting the amount of excess capacity that had developed in the economy over recent years. Even as the economy recovers, these displaced workers will likely be unemployed for a prolonged period." —Richard Moody, chief economist at Forward Capital
"The labor force has now jumped by more than 1 million over just the past two months, with the participation rate (the proportion of the population that is part of the labor force) increasing from 65.5 percent to 65.9 percent. This sort of rise in the participation rate is very unusual at this stage of the economic cycle — usually, an increasing number of individuals become discouraged when employment prospects are bleak and they drop out of the labor force. We suspect that the recent rise in the labor force reflects statistical noise that will be reversed in coming months. .... A pullback in the labor force should help to temper further increase in the unemployment rate. Thus, we still look for a peak unemployment rate of about 10 percent later this year." —Ted Wieseman and David Greenlaw of Morgan Stanley Research
"While the improvement in the May payroll performance seems to have been at least partly skewed by an overly generous "birth-death adjustment" (which accounted for a full two-thirds of the unadjusted rise in private payrolls in the month), it is nonetheless clear that payroll declines are on a moderating path. However, the reported payroll change for May is considerably smaller than signaled by other labor market indicators, which is probably at least in part due to the birth-death adjustment. ... We continue to believe that we are still some time from stabilization in employment conditions, and even further from sustained growth in payrolls." — Joshua Shapiro, chief U.S. economist at MFR