U.S. Jobs Drop Again; Unemployment Rate Stays High at 5.5%

Payroll employment declined for the sixth consecutive month in June, dropping 62,000. This was generally in line with markets expectations for a drop of 60,000. More disappointing was that fact that declines in earlier months were revised to show even greater weakness, with May employment now down 62,000 (down 49,000 previously) and April off 67,000 (down 28,000previously). Also disappointing was the fact that the unemployment rate held steady at 5.5%. After jumping higher in May from 5% in April, expectations had been for a modest retracement back down to 5.4%.

Employment declines were relatively broadly based. Goods-producing industries saw employment drop by 69,000, led by employment in construction falling by 43,000 and in manufacturing by 33,000. Service-producing jobs remained in the positive column, although just barely, with employment up 7,000. However, this was largely achieved by large gains in two main components: government (up 29,000) and leisure and hospitality (up 24,000). Most other service areas declined, led by a whopping 51,000 drop in professional and business services.

The workweek for the overall economy held steady in June at 33.7 hours, although it dropped slightly for manufacturing to 40.8 hours from 40.9 hours in May. The combined effect of the employment and the workweek is captured in a separate measure, the index of aggregate weekly hours. For the second quarter as a whole, this index is down an annualized 0.7%. Assuming productivity growth of 1%-1 ½%, this implies GDP growth of around ¼% to ¾%. This conveys the idea that, although the economy is showing job losses, the declines to date have been relatively modest and not inconsistent with GDP growth continuing to eke out small gains.

More worrying was a separate report out this morning that showed jobless claims are continuing to trend higher, rising to 404,000 for the week ending June 28. If this trend continues in subsequent weeks, it would flag the risk of even more marked declines in payroll employment in July.

The key wage measure in the report, average hourly earnings, rose an expected 0.3% in the month. This resulted in the year-over-year rate holding steady at 3.5% in both June and for the second quarter. It is of note that, on a quarterly basis, this rate has generally been trending lower since a recent peak of 4.2% in the first quarter of 2007.

The continued declines in employment suggest a negative factor weighing on household spending in the near-term. Fortunately, the recently issued tax rebate cheques are providing an offset as evidenced by the stronger-than-expected consumer spending numbers in May. However, this support from fiscal policy will be relatively short-lived and is likely to fade by the end of the current quarter.

Our forecast assumes that by then labour markets will start to improve as the restraint from the credit tightening and high energy prices starts to ease. However, if these negative factors persist, concern will re-emerge about GDP growth remaining positive in the fourth quarter and going into 2009. This downside risk to growth is expected to result in the Fed opting to hold Fed funds unchanged at a still-stimulative 2% through the first half of next year despite increasing concerns within the Fed about inflation pressures building in the system.

RBC's U.S. consumer confidence index slips again

The RBC Cash Index stumbled once again in July, posting the sixth decline in the past seven months. The index stands at 14.6, a record low for the index and off 7.9 points from June. Three of the four sub-components recorded declines, with the jobs index moving up marginally.

The current conditions index slipped to 30.5 in July, a record low for the series, from 40.5 in June. The expectations component fell to -54.7, sending the index to a new record low reading following May's temporary improvement. The investment sub-component also recorded a new record low of 36.1, signalling that households have become increasingly less willing to make major purchases. The jobs index edged up to 89.1 from 87.3 after falling for six consecutive months.

U.S. consumers face the triple-whammy of falling home prices, softening labour market conditions and rising gasoline prices, which has sent most major sentiment indices to extremely low levels. These factors are keeping some consumers on the sidelines, although the initial receipt of the tax rebate cheques in May supported a larger-than-expected increase in retail sales. We expect the tax rebates will support consumption spending throughout the second and third quarters, but the question is whether the tone in the economy will improve enough to rejuvenate consumers' spirits and support a sustained improvement once the effects of the stimulus package wear off.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.