Another Disappointing Payrolls Report For June

Private-sector payrolls grew by a sluggish 84,000 on a net basis in June, the Labor Department reports. That’s down from the revised growth of 105,000 in May. It’s a disappointing report in absolute terms, and it doesn’t help that yesterday’s far-more encouraging ADP estimate inspired expectations that we’d see something better. But while no one can deny that the jobs growth is s-l-o-w, according to the government’s figures, it’s still premature to argue that it signals a new recession.

Most of the commentary today is likely to focus on the June payrolls number and how unimpressive it looks compared with May and earlier months this year. I don’t want to dismiss that line of worry, but there’s a danger in letting it dominate the analysis. There are plenty of reasons to be concerned about the labor market and the economy overall, but let’s also maintain some perspective on what’s been unfolding.
Let’s start by reminding everyone that revisions to payroll estimates can and do swing wildly through time. For example, the initial report for May’s private-sector payrolls was a tepid 82,000, as I discussed a month ago. That number has since been revised up to a rise of 105,000 net new jobs for May. Hardly a game changer, but it’s one more reminder that what you see today isn’t necessarily what you’ll find tomorrow.
In fact, if you look at revisions since 2000, monthly estimates for the total number of people on private-sector payrolls have varied far and wide. Indeed, over the past decade, revisions for the monthly total of payrolls have been as high as nearly 800,000, and cut by more than 1.6 million, according to the St. Louis Fed. Revisions aren’t generally so extreme, but it’s safe to say that it’s always wise to remain skeptical for thinking that the first estimate is the last word on labor market’s trend.
There’s also some risk in looking solely at the absolute monthly figures and comparing it to the previous estimate. One way to look for deeper perspective is to consider how the year-over-year change compares. For several reasons, we’re likely to find a more robust reading on the labor market by watching the annual percentage changes. With that in mind, consider how the two metrics compare. Although June’s tepid rise in private-sector employment looks quite weak (the red line in the chart below) in absolute numbers vs. the month before, the trend looks considerably better in terms of the year-over-year comparison in percentage terms (the black line).

The 1.78% rise in the private-sector employment tally as of last month vs. a year ago is near the 2.09% jump for January 2012—the best year-over-year comparison since the Great Recession ended. Clearly, the pace of payrolls growth has slowed since January, but it’s a stretch to say that the trend has collapsed. Analysts were quite giddy in January; today, they’re feeling quite sullen. A 31-basis-point retreat in the annual pace of job growth certainly has a big impact on sentiment, but it’s debatable if it’s also a death cross for the economy.
Meantime, the fact that initial jobless claims continue to trend lower on a year-over-year basis, as I noted yesterday, suggests that we’re suffering from slow growth rather than a descent into a new recession, at least for the immediate future.
That’s still a long way from arguing that all’s well. With unemployment stuck at an elevated 8.2% for last month, it’s clear that the economy continues to face substantial headwinds. That’s a huge problem on numerous fronts, starting with the negative impact it brings to so many individuals who can’t find work or must take lesser jobs to make ends meet.
That said, there’s still no smoking gun in today’s jobs report in broad macro terms. It’s discouraging and well below what’s needed to move closer to the pre-recession levels of prosperity experienced before the economy crumbled in 2007-2009. But slow growth, for all its problems, shouldn’t be confused with the onset of a new recession—at least not yet.
“The job market is soft, as is the overall economy,” says David Resler, chief economic adviser at Nomura Securities via Bloomberg. “I’d characterize our reaction as much the same way the Fed will react — not surprised but disappointed. It’s just not the kind of growth we need to see at this stage in the business cycle.”
The main risk factor now is that we’re out of room for further disappointment. On that point, everyone agrees. More disturbing economic reports may be coming. When (or if) that happens, the warning will be conspicuous in the numbers, including a substantial drop in the year-over-year percentage change in private payrolls. But for the moment, it’s not obvious that the end is near, even if it’s easier to imagine such a future. In sum, let’s not start the funeral proceedings just yet.