The Recession in the Rearview Mirror is Closer than it Looks

Anybody who felt complacent about threats to the economy got a rude jolt this morning. The Bureau of Labor Statistics released its employment estimates for August this morning, which showed a decline of 4,000 non-farm payroll jobs. This is the first employment decline since August 2003.

Large employment losses occurred in construction (22,000 jobs), manufacturing (46,000 jobs), and local government education (31,800). And the employment gains for the prior two months were revised downward by a total of 81,000. One month does not comprise a trend, but the shockingly weak employment figures for August certainly illustrate that the instability brought by the end of the housing boom should not be underestimated.

The numbers for August are a poignant reminder that the labor market has been slowing for some time. On average, employment only grew by 133,300 jobs each month during the past 12 months. This is a 30.4 percent decline relative to the preceding 12 months, which already had 9.1 percent fewer jobs added each month than the 12 months before that.

The basic employment story is that the end of the housing boom has not been offset by growth and employment creation in sectors related to exports and investment. Residential real estate employment declined by 23,000 jobs in August, which is a reflection of the ongoing housing slump. And at the same time, commercial construction, which was an important contributor to business investment growth, added only 5,000 new jobs among construction companies and contractors in August. This is better than no job gains, but it is clearly not enough to stop the labor market and the economy from slowing further.

Export growth has been a bright spot of economic growth in recent quarters. But this growth needs to translate into more jobs in manufacturing—since the vast majority of exports are manufactured goods—in order for exports to emerge as a strong and durable engine of growth. Unfortunately, manufacturing showed its largest one-month loss since July 2003. The declines in manufacturing came especially in durable goods, such as machinery, cars, and furniture, among other industries, with a total loss of 30,000. There are no signs that the export growth of the past few quarters contributed to stronger activity in the pivotal manufacturing sector.

As in previous months, the sectors that showed the largest employment gains were health care and restaurants. Health care added 35,300 new jobs in August and restaurant employment grew by 24,100 jobs.

Today’s figures clearly show that employment opportunities are disappearing for a broad swath of demographic groups. The employed share of the population as a whole declined to 68.2 percent in August, the lowest share since December 2005. The employed share of men declined by 0.3 percentage points, and that of women decreased by 0.1 percentage points. The employed share of whites dropped by 0.3 percentage points to 63.3 percent in August and the employed share of African Americans fell by 0.3 percentage points to 58.7 percent, although the employed share of Hispanics increased by 0.7 percentage points to 65.4 percent. The improvement for Hispanics is possibly the result of an increased share of Hispanic women in the workforce, which may be a reflection of the continued strength in hospital and restaurant employment.

Wage growth appears to be holding up at a moderate level for the time being despite declining employment. Both hourly and weekly earnings of production non-supervisory workers—the vast majority of workers—increased by 0.3 percent in August before inflation is accounted for. It remains to be seen if these growth rates are enough to let wages rise even after accounting for inflation. After all, in the first seven months of 2007, inflation-adjusted hourly earnings dropped by 0.6 percent and weekly earnings by 0.9 percent.

Today’s employment figures do not bode well for the strength of the U.S. economy. The slowdown in employment took a nosedive in August with the first recorded drop in employment in four years. One month does not make a trend, but the chance of a recession clearly grew over the summer.