Following the positive surprise in May, the June employment report was a big setback for the optimist camp. Following are the most meaningful facts from the report.
The headline came in at -467k compared with -350k consensus and the back revisions were negligible (+8k). (…)As always, the devil was in the details. In almost every industry, job losses were deeper in June than they were in May. The diffusion index fell to 28.6 from 31, which means that nearly three-quarters of the corporate sector is still in the process of shedding jobs.
Think of (the diffusion index) as a measure of how widespread the job losses are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. Before September, the all industries employment diffusion index was close to 40, suggesting that job losses were limited to a few industries. However starting in September the diffusion index plummeted. In December, the index hit 20.5, suggesting job losses were very widespread. The index has recovered since then, but declined slightly in June to 28.6, suggesting job losses are still widespread.
The manufacturing diffusion index fell even further, from 40 in May 2008 to just 6 in January 2009. The manufacturing index is still very low in June (13.9) indicating widespread job losses.
Year-over-year employment losses are over 4% and average weekly earnings, the proxy for wage-based personal income, fell 0.3% in June. Over the past 4 months average weekly earnings have declined at a 1.6% annual rate.
So wage-based personal income is dropping at an annualized rate of $350B, partly offset by transfer payments rising at a $200B rate, leaving a gap of some $150B. This means that pretax personal income could soon be dropping 1.5% yoy. Deflationary, is it not?
The average workweek dropped to a record low of 33 hours from 33.1 in May.
in fact, what this means is that if companies had kept hours worked at May’s levels, then to achieve the same labour input that they achieved would have required a 800,000 job slice!
The length of the workweek tends to respond at turning points faster than does the number of jobs. When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off. The phenomenon is called “labor hoarding.” Conversely, when demand beings to rise, firms tend to increase the workweek, before they hire new workers. (To take two historical examples, the “change in total hours worked” improved in both April 1991 and November 2001, which on other grounds were eventually declared to mark the ends of their respective recessions.)
As one consequence, total hours worked fell 0.8% that month, continuing the same rapid deterioration we have seen since last September, the month when Lehman Brothers failed and the recession worsened sharply.
Average weekly earnings – the proxy for wage-based income – fell 0.3% in June and have been flat or down in three of the past four months. During this interval, they have deflated at a 1.6% annual rate – versus a +1.8% trend a year ago and +5.2% two years ago.
The implications for consumer spending once the fiscal stimulus subsides in the second half of the year are clearly negative, with similar implications for corporate profits and the equity market which de facto priced in a V-shaped earnings recovery.
And, to top it off, here is a scary chart:
Contributors for this post were CalculatedRisk, David Rosenberg (Gluskin Scheff) and Jeff Frankels
