Doubts Arise About the Economy’s Momentum

Last week’s second quarter economic growth estimates indicated that the economy may be shifting from a consumption-driven economy to one carried forward by exports and business investment. But if that is indeed the case, it is certainly not showing up in the July employment figures released today by the Bureau of Labor Statistics.

The economic growth momentum in the second quarter is matched by slowing employment growth. Less consumer spending on all consumption items and their homes is taking an expected toll on retail and residential construction employment. But manufacturing employment and commercial construction, which should be rising if the economic growth trends were reflected in the employment figures, also lost jobs in July. This leaves comparatively meager jobs gains that are driven by two perennial favorites—employment in health care and restaurants.

According to the BLS, the economy added 92,000 new jobs in July. Many observers suggest that this means consumers will be fine since at least some jobs are added. By that logic, any job gain is good news. It is certainly better than no job gains, but it is also a far cry from the kind of strong labor market performance that consistently leads to improved living standards.

Importantly, the job growth in July 2007 fell behind population growth. The employed share of the population therefore dropped from 63.1 percent in June to 63.0 percent in July. The addition of new jobs in July was the smallest increase since February of this year. This also means that the average monthly job creation this year was 136,400, down from a monthly average of 188,600 in 2006 and 211,800 in 2005.

Thus continues the trend of very weak employment performance throughout this business cycle, which started in March 2001. Since then, total average monthly job growth was 0.7 percent on an annual basis, or about one-third the average growth rate of previous business cycles. In fact, only 10 out of a total of 76 months in this business cycle had above average job growth—the last one was March 2006.

Slow job growth has also meant modest wage gains. Hourly earnings rose, before accounting for inflation, by 0.3 percent, which is slightly less than in previous months. Weekly earnings were flat in July before adjusting for inflation. These modest wage gains are worrisome since inflation adjusted wages have been fairly flat for most of this business cycle. In June 2007, the last month for which data area available, inflation adjusted hourly earnings were 2.3 percent higher than in March 2001, and inflation adjusted weekly earnings were only 1.8 percent higher than at the start of the business cycle. This growth masks the fact that both inflation adjusted hourly and weekly earnings have dropped by 0.8 percent since the beginning of the year.

 

It doesn’t seem surprising that consumption spending on consumer items and real estate are slowing or even declining since consumers are not even seeing the meager employment and wage gains of the past few years. This also translates into job losses in retail and in residential construction. Retail employment dropped by 1,200 jobs in July, after already declining by 13,500 jobs in June. And, employment in residential construction, both by construction workers and specialty contractors, also decreased by 1,600 jobs in July 2007.

Given overall economic trends, these employment changes are not unexpected. Yet what is surprising is the weakness in commercial construction. After all, commercial construction activity expanded at its fastest rate in more than a decade in the second quarter of 2007. But this momentum did not translate into job gains in July. Commercial construction employment dropped by 8,200, making July the fourth month this year with employment losses in commercial construction.

Also troublesome is the continued weakness in the manufacturing sector. The economy received a big boost in terms of economic growth from international trade. The vast majority of U.S. trade is in manufactured goods. One would expect that the continued strength in exports would ultimately help to put a stop to the employment losses in manufacturing. But manufacturing lost another 2,000 jobs in July, the thirteenth monthly decline in a row.

The modest gains that were recorded in July can be added to just a few sectors that have been steadily adding jobs. One is health care, which grew by 36,100 jobs, and the other is restaurants, which increased by 22,200 new jobs in July. The financial sector also added 27,000 new jobs in July.

The economic momentum that seemed to exist in the second quarter and was reflected in recent economic growth figures has not translated into a stronger labor market performance. On the contrary, in July 2007, the labor market slowed its modest pace even further. For the economy to move to a sounder footing, economic growth also needs to translate into job and wage gains, first in manufacturing and commercial construction, but also in retail and other consumer-related industries. Without these broader job and wage gains, the economy will have to rely on a few sectors to create new jobs, which will likely mean a continuation of meager employment gains and flat inflation adjusted wages.