Is There Really a Labor Market Slump?

The Bureau of Labor Statistics today released its latest employment estimates, which revealed increased job growth for the second month in a row. The BLS estimates that a total of 167,000 new jobs were created in December 2006, and that in the prior two months, 29,000 new jobs were created above initial BLS estimates.

What’s more, this welcome news was accompanied by some substantial wage gains for workers. Weekly and hourly earnings in December were 0.5 percent higher than in November. Weekly earnings were 4.5 percent higher than a year earlier, while hourly earnings rose by 4.2 percent over the same period.

Does this mean the recent labor market slump that many economists expected to continue in 2007 is over? Today’s jobs figures offer no clear answer, but they include a number of warning signs that beneath the surface, things are not as strong as they appear. In particular, 2006 registered weaker job gains than in the prior two years as employment weaknesses continued across broad swaths of the economy—raising concern that the end of the great American housing boom is taking its toll and could spread further.

Job creation slowed markedly in 2006 compared to prior years. In 2004, an average of 174,800 new jobs was created each month, which slowed to 165,100 jobs in 2005 and to 153,200 new jobs in 2006. This is a drop of 12.8 percent over the course of two years.

Importantly, this slowdown came amid what was already the slowest job growth during any business cycle since the Great Depression. On average, employment grew each month by an annualized rate of 0.5 percent, less than one-fourth the rate of previous business cycles. And, since March 2001, when the current business cycle began, there were only six months with job growth above the historic average. None of those six months fell into 2006.

Big contributions to job growth in December came in the area of professional and business services, which added 50,000 new jobs, especially in administrative services and building services. Another big contributor was the health care sector, which added 38,100 new jobs in December 2006. And restaurants added another 22,600 new jobs. Health care and restaurant employment have been steady contributors to job growth in 2006.

Against these solid job gains, though, are clear weaknesses that suggest the labor market slump evident in the fall of last year could spread even further in 2007. Specifically, the housing boom is clearly over. The construction sector lost 3,000 new jobs in December, despite an unusually warm weather, marking the fourth month in a row of declines.

The drop in the housing market has clearly spilled over into other related areas. Housing-related sectors, such as furniture retail, building materials, retail and real estate financing, lost a combined 6,300 jobs in December. As a result, construction and housing-related sectors of the economy added on average of only 6,300 per month in 2006, compared to 33,300 jobs per month in 2005. In each of the last four months of 2006, employment in these sectors decreased.

Apparently, homeowners felt less wealthy and borrowed less against their homes, dampening their shopping enthusiasm with negative consequences for retail jobs. Evidence of this is apparent in the decline in retail employment growth in 2006, which averaged 4,800 per month in 2006 compared to gains of 13,400 jobs per month on average in 2005. In fact, there were seven months of job declines in the retail sector in 2006, including a drop of 9,200 jobs in December.

As consumers became increasingly reluctant to open their wallets in 2006, parts of the manufacturing sector took a hit too. Specifically, the automobile sector lost another 4,600 jobs in December and furniture manufacturing employment dropped by 2,400 jobs. Business-related manufacturing employment was also largely flat or in decline, with a total decline of 12,000 jobs in the manufacturing sector in December.

With a cooler housing market and slower consumer spending growth affecting large parts of the job market, the question now is whether this weakness will eventually spread even further into the restaurant sector or perhaps even further into other services sectors. If the slowdown spreads further, it could also take a toll on wage gains. That would be highly unwelcome for hourly and salaried workers who have experienced only fleeting upturns in take-home pay in recent years amid relatively strong economic growth and a booming stock market.