Will Job Growth Suffice?

Private-sector payrolls rose by 209,000 last month on a seasonally adjusted basis, according to yesterday’s ADP Employment Report. That’s pretty good, but is it good enough? The question resonates because while job growth has clearly perked up recently, at least compared with the modest pace for last year’s seven months through November, the faster rate of jobs creation hasn’t curtailed the slow deterioration in the year-over-year change in disposable personal income, at least not so far. Maybe that critical bit of progress is coming; if so, good news on this front is contingent on keeping payrolls rising at a healthy clip. Unfortunately, ADP’s estimate of March payrolls was a slight downshift from February. Granted, the change was slight—a net gain of 209,000 vs. 230,000 in February. That didn’t stop analysts from dispensing upbeat comments.

“My conclusion is the employment growth trend that we’ve seen over the last year remains in place and we probably will see a decent employment number on Friday when the Department of Labor reports non-farm payrolls,” says Fred Dickson, chief market strategist at D.A. Davidson & Co.
That’s more or less the view of Joel Prakken, chairman of Macroeconomic Advisers, which creates the ADP report each month. “Labor market conditions continue to improve at a moderate pace,” Prakken said in a press release. “Employment grew in all the major sectors of the economy tracked in The Report, and across payrolls of all sizes.”

But with Joe Sixpack’s disposable personal income growing at ever-slower rates, it’s reasonable to wonder what’s in store for the economy in the months ahead without a substantially higher round of job creation? Optimists like to emphasize that consumer spending is rebounding, which is no small feat for an economy that relies heavily—roughly 70% of GDP—on personal consumption expenditures. The latest update on personal income and spending certainly shows that February was a good month for consumption. Income growth, however, continues to slow, despite the improvement in jobs creation. On a year-over-year basis, disposable personal income’s growth is near its slowest pace on record—2.6%. The only time it was lower on a sustained basis was during the depths of the Great Recession.
How does the slowdown in income growth square with the relatively strong pace of spending? Economist Tim Duy considers one explanation:

The acceleration in auto sales is clearly supporting this trend since the middle of last year. Apparently, what’s good for Detroit is still good for America. The importance of autos in sustaining spending begs the question of what will occur when pent up demand is satisfied? Obviously, auto sales will stop contributing positively to growth as sales level off at some point in what I would expect to be the not to distant future. This is especially the case considering the anemic pace of personal income growth.

Hopefully, income growth will accelerate as the labor market improves. Otherwise, households will need to take on additional debt or running down saving rates to hold the current trend in place.

That doesn’t sound like a recipe for sustainable growth, but the analysis brings us back to evaluating the outlook for the labor market. To be fair, the outlook is still open for debate. One reason for remaining optimistic comes from looking at the average weekly hours worked for production and nonsupervisory employees. As the second chart below shows, weekly hours worked have climbed sharply in recent months. That’s a clue that the private sector will continue to mint jobs at a respectable pace in the near-term future.

That sets us up for the next data point: initial jobless claims (scheduled for release later today), which will help us decide if the labor market can maintain its higher growth rate of recent months. It was last year’s drop in new claims that offered an early signal of the labor market’s latest acceleration. Weekly claims are likely to offer more clues about where we’re headed for what amounts to the main support system for the economic recovery: jobs. The good news is that the consensus forecast sees another decline for new claims, according to Briefing.com.
Meanwhile, tomorrow brings word of the government’s March payrolls reports. Unfortunately, the outlook echoes ADP’s update: a modestly slower rate of private-sector job growth for March. That wouldn’t be enough to derail the case for expecting economic growth, but it wouldn’t be enough to overcome worries about sluggish income growth either.