Underlying Labor Market Weaknesses Persist

Moderate growth this month and upward revisions may instigate false optimism, but it’s important to examine the story that the numbers are telling.

New estimates from the Bureau of Labor Statistics today bring welcome news for many job seekers, but they still cannot cover the fundamental weakness of the labor market. The economy added a moderate 110,000 new jobs in September 2007, and the BLS revised its estimates for July and August up by 118,000 jobs. Yet this job growth is too low to keep unemployment from rising. The job growth also remains concentrated in a few industries, and the upward revisions for the last few months are juxtaposed with likely downward revisions for earlier months.

The job growth figures for September are certainly better than many observers had expected, but then again, people’s expectations were low to begin with. Monthly employment growth for the current business cycle, which started in March 2001, averaged 0.7 percent on an annualized basis, or about one-third the job growth of previous business cycles. Employment growth exceeded the average monthly job growth of previous business cycles in only 10 months out of 78 months in the current cycle. The last such month was March 2006.

Job growth is also lower now than the already slow growth in previous years. Over the past 12 months, average monthly job creation was 135,750 jobs, down from 199,300 jobs in the previous 12 months, which was already below the 205,300 jobs per month that were created on average in the 12 months before that. Put differently, job creation over the past year was 33.8 percent below the level of two years earlier.

Much of the job growth in September came from health care and restaurant employment, as has been the case for some time. Health care added 33,400 new jobs and restaurants added 25,400 new jobs. Together with hotel employment and social assistance jobs, these sectors account for almost three-quarters, or 73.5 percent, of the job gains in September.

Professional and technical services were another bright spot in the labor market in September, adding 37,100 new jobs, largely in the areas of accounting, consulting, and local education employment, which increased by 18,800 jobs.

Losses in a number of critical sectors offset these gains. Manufacturing employment decreased by 18,000 jobs, the 15th consecutive month of declining employment in a row. Construction employment dropped by another 14,000 jobs, the third month of job losses. Much of this decline comes from the residential housing sector, where employment at construction companies and specialty contractors decreased by 20,000 jobs in September, marking the sixth straight month of losses.

Jobs in retail disappeared again, at a rate of 5,200 jobs, in large part due to a drop of 16,700 in stores that sell building materials. And the financial service sector lost jobs at a rate of 14,000 in September.

Many of the September job losses are due to the continued weakness of the housing sector. Construction and related employment—real estate financial services, furniture retail, and building materials retail—lost a total of 26,300 jobs in September, the third straight month of such losses.

The BLS revisions for July and August, which increased job creation estimates by 25,000 and 93,000 jobs respectively, came almost entirely from large changes in local education. Upward revisions in this sector, primarily jobs for teachers, explained 76 percent of the changes for July and 97 percent of the revisions for August.

These upward revisions stand against expected downward revisions for the entire year. Each September, the BLS releases its preliminary estimates for the year’s benchmark revisions. According to today’s preliminary estimates, the economy had 297,000 fewer jobs—a 0.2 percent downward revision—in March 2007 than previously reported. This is the largest preliminary downward revision since September 2002.

Low expectations make is easy to be overly optimistic about job gains over the past few months, but it is important to look closely at the numbers and actual change over time to get an accurate story. The employment landscape is marked by anemic job growth, particularly when compared to the job growth of previous business cycles and the last few years. And this weakness is largely due to troubles in the housing and mortgage markets.

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Christian E. Weller

Senior Fellow