US: Recessionary Unemployment Dynamics

Overview: The US unemployment rate jumped to a five-year high of 6.1% in August from 5.7% in July. Labour market dynamics are now sending mixed signals, as the move in the unemployment rate is consistent with a recessionary US economy, while the trends in job losses continue to look more moderate. The economy shed 84K jobs in August (DB -90K, Consensus -75K) and the net revision to employment figures for the previous months amounted to -58K. Thus, overall job losses amounted to 142K persons. The only positive for the economy was the reading on earnings growth which managed to increase by 0.4% m/m and is trending slightly higher on a three month average.

Details: The private sector shed 101K jobs, somewhat above the trend of -90K seen over the past three months. Increased weakness was seen in the manufacturing sector (-61K) while the correction in the construction sector is happening at a slower pace. The sector shed 8K jobs, which is significantly below the recent trend. Temporary help services, which is usually a good leading indicator for overall employment, remains weak with a job loss of 37K.The non-cyclical parts of the labour market continue to provide support to overall job growth. Education, health, leisure and hospitality added 68K jobs in August, and adjusting for these components the private service sector has shed 97K jobs over the past three months.

The jump in the unemployment rate is not based on a higher than usual growth in the workforce but rather a significant decline in employment in the household survey. The labour force grew by 250K persons which is only slightly above the 222K average seen over the past six months, while employment dropped by 342K. Private working hours declined 0.1% on the month and are down -1.8% AR over the past three months, suggesting that the private sector is trimming working time before shedding jobs.

Wage gains were revised higher and average hourly earnings rose 0.4% m/m, taking the three-month growth rate to 3.6%, above July's 3.4%. We find it surprising that average hourly earnings should be able trend upwards in a period when the overall labour market is weakening. However, If sustained, it will act as a welcome cushion for the US consumer. Our payroll income proxy has been slowing at a relatively fast pace in recent months and is now pointing to a quarterly nominal compensation growth rate of 2.9% AR. Hence, consumers will face a hard time when the impact from the tax rebates fade.

Assessment & Outlook: Going forward, we expect the economy to remain sluggish and well below trend growth. The underlying weakness in the economy is likely to keep job losses around the current moderate pace in the coming quarters. The unemployment rate has moved faster than we had anticipated and the underlying weakness in the economy will keep unemployment drifting upwards, which makes it very difficult for the Fed to raise interest rates any time soon.

Danske Bank
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