Consumer Fatigue Weakens Job Growth

Today’s unemployment report highlights a worrying trend for American families and the U.S. economy. Only 51,000 new jobs were added to the economy last month—the lowest job creation rate in a year—with much of the slowdown in growth attributable to more reluctant consumer spending on consumption and housing.

According to the monthly estimated employment figures released today by the Bureau of Labor Statistics, jobs grew by an annualized rate of 0.5 percent in September, the lowest increase since last October. This was not an isolated incidence. Over the course of the past twelve months, job growth was 16 percent slower than in the preceding job growth.

Despite comparatively weak income growth, consumers have been the drivers behind recent economic growth, largely by borrowing faster than before. But with consumer debt at 129.3 percent of disposable income at the end of June this year, consumers appeared to get weary of being at the center of debt driven growth. This clearly spells trouble for job growth.

Weakening job growth is occurring in what had already been a prolonged period of well below average job growth. Average monthly job growth for this business cycle, which started in March 2001, totals 0.4 percent on an annualized basis, which is less than one-fifth the rate of growth of prior business cycles. In fact, only six out of 66 months of this business cycle had above average job growth.

And it is not as if consumers traded off job growth for wage growth. Inflation-adjusted weekly earnings in August 2006, the last month for which data is available, were almost identical to those in March 2001. Inflation-adjusted hourly earnings were only 0.9 percent higher after more than five years.

In September 2006, both weekly and hourly earnings increased by 0.2 percent before inflation. In comparison, prices in each of the past six months increased by at least 0.2 percent, and the average monthly inflation rate for the twelve months ending in August, the last month for which data is available, was 0.3 percent. If these trends continued, wage growth in September did not keep pace with price increases.

The continued weakness in employment and wages, combined with sharply higher prices for housing, health care, college education, and transportation, led many families to take on record amounts of debt. Data from the Federal Reserve show that households owed on average 129.3 percent of their disposable income in consumer debt by the end of June this year. As families have to pay back this debt, it will likely put a strain on consumer spending, especially in the face of higher interest rates.

Burdened with record amounts of debt, and faced with higher interest rates and a slowing labor market, families appear to be restricting their spending habits. This is apparent in today’s employment figures. Retail sector employment, for example, declined by 11,900 jobs in September. That is, in five out of the last six months, employment in the retail sector dropped. On average, retail lost 18,300 jobs per month over the last six months.

The fact that consumers are pulling back is also visible in construction-related employment. Job creation in construction and related sectors, such as furniture and building materials retail and real estate finance, has slowed substantially. Construction alone added only 8,000 new jobs in September, furniture and building materials retail added only another 2,100 jobs, and real estate finance only 400.

For the past six months, construction and related employment added on average 8,400 new jobs per month—about one fifth of the jobs added each month in the preceding six months. Slowing job growth in construction and related sectors is especially troubling. The reason: employment growth that did occur during the current business cycle depended to a very large degree on the construction boom. Between March 2001 and March 2006, 69.1 percent of private sector job creation and 41.7 percent of total job creation came from construction and related sectors.

What’s worse, help is not coming from many other sectors. Weaknesses in job growth are noticeable in a large variety of sectors. Cases in point: manufacturing lost 19,000 jobs in September; natural resources and mining added no jobs; private education institutions lost 16,600 jobs; arts and entertainment related jobs, such as museums and amusement parks, declined by 9,200 jobs; the federal government cut 4,000 jobs; and state governments reduced their number of employees by 22,000, especially in the education sector.

To a large degree, the remaining job engines depend on consumers’ willingness to spend more money. In particular, hotels and restaurants added 19,200 new jobs. At this point, the economy is thus dependent, especially if consumer spending further weakens, on the continued employment strength in the health care sector, which grew by 31,200 jobs in September.

Middle class families find themselves in a vicious economic cycle. Their jobs depend on their spending, but their spending depends on income from new and better paying jobs that have not been forthcoming in this business cycle. Families broke out of this cycle by borrowing more.

In reverse, this means that high debt burdens now reinforce the slow down in job growth since families have to make their debt payments on record amounts of debt amid weakening employment increases and flat wage growth. The economy thus needs a significant turnaround in job and wage growth so that families can both meet their debt obligations and push the economy forward again through more spending.