The U.S Employment Scene

This is a very busy week for economic statistics out of the major economies but the one statistic that always stands out from the rest at this time is the US non-farm payroll numbers together with the unemployment figures.  These are announced on the first Friday of each month and are preceded by the ADP employment change, challenger jobs cuts, non-farm productivity and unit labour costs on the Wednesday and Thursday.

The reason for them being regarded as so important is that they, more than practically anything else, are seen as the bellwether of the US economy by economists and policy makers there.  As the US remains the largest economy in the world the state of the economy is very important to the rest of the world.  It is said in the UK that if the US sneezes we (and that could be the rest of the world) catches a cold.  As a result markets around the world will wait anxiously for them to be announced and they will dictate the confidence and mood of markets in the short term.

The statistics mentioned are all only the headline numbers but each has been the product of a report in which many more numbers can be found.  These numbers will advise economists not only whether the US economy is expanding or contracting but which sectors are contributing the most or least to the over-all performance, whether the US workforce is expanding or contracting and how many are contributing to the economy. They supply a measure of the cost effectiveness of the workforce and whether or not they are contributing to profitable growth.

The ADP employment change numbers are one of the first to be published.  This week we heard that 179,000 people had been added to the US workforce in the private sector only.  This compared to 215,000 in April this year and 163,000 in May last year.  Drill down and, interestingly, 82,000 jobs were created by small (employees less than 50), 61,000 by medium size businesses (between 50 and 199 employees) and 37,000 only by large companies.  That will be regarded as healthy as it is the growth of small companies that will drive growth in the economy and provide the large companies of the future.  It will, of course, also include those that have given up looking for a job and turned to self-employment for income. These are further broken down into various industrial categories and thereby give guidance as to where the growth is to be found.  Typically construction workers will be one of the first to show growth as they tend to be laid off more quickly in a downturn and are one of the first to grow in a recovery.

Non-farm productivity has been reported as -3.2% in the first quarter of 2014.  This compares with an estimate of -2.7% and the previous quarter’s figure of +2.3%.  It is the worst figure since 2008.  This poor performance has contributed to an increase in labour costs of 5.7% in the quarter and is, clearly, a bad sign for profits from business.  The poor productivity figure came from an increase in hours worked but with a decrease in output there is less produced per hour worked.  The probability is that these first quarter figures were badly affected by the very cold weather in the US during the period.  Perhaps the hours worked or/and paid for were spent in clearing snow and travelling to work rather than producing goods?  In that case there should be a sharp recovery in the figure when the second quarter figures are produced.

These figures will be followed on Thursday by the Challenger jobs cut report.  This keeps track of the lay-offs announced by industry and gives a picture of the state of the jobs market.  It cannot, however, be used to make a judgement on what is happening now as it is only reporting on announcements.  Many of the jobs to be cut will not be lost for several months.  The business’ circumstances may change in the meantime and the jobs saved or the jobs could be re-allocated or lost through natural wastage such as employees leaving for their own reasons or retiring.  These figures should then only be used to guide on confidence or to monitor trends in employment.

Finally we reach the all-important non-farm payroll numbers and unemployment rate.  The non-farm payroll is a compilation of those working in areas other than farmers and those working in non-profit organisations.  So it is more an indication of the numbers working for business in the production of goods and services, in manufacturing and in construction.  A figure of, in excess of, 200,000 is thought to be needed to create an environment of growth.  That figure should compensate for job losses through other means such as immigration and retirement.  Clearly, a figure well in excess of 200,000 is needed for it to represent strong economic growth and that is why it is regarded as so important.  It gives a relatively clear picture of the strength of the economy.  Care needs to be taken, however, as one month’s figures can be affected by short term factors so a better guide is the picture given by the quarterly numbers. A figure of 219,000 is forecast for May which compares with 288,000 in April.

The unemployment numbers are also regarded as very important, as they are in any developed economy.  This figure is, currently, 6.3% which is a big improvement on figures twelve month’s ago when they were 7.6%.  They do, however, cover some wide disparities such as the 19.1% of unemployed teenagers or 11.6% for blacks and 7.3% for Hispanics will indicate.  The unemployment rate is a percentage of those unemployed to those in work which then hides the fact that those in work only represent a percentage of those eligible to work.  Last month the participation rate was 62.8% compared with 63.2% in the previous month.  This figure is the source of much disquiet in government and in the Fed where it is seen as a sharp reminder of those that have been left behind and could be measured as a large increase in spare capacity.

These figures are all highly important in judging the health over time of the US economy and should be watched closely by anyone interested in the economic and political trends.