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David Hale: Did Small Business Depress the June Employment Report?

Dear Clients, Please find attached our latest bulletin, “Did Small Business Depress the June Employment Report?” The bulletin analyzes the disappointing June employment report, and observes that the employment outlooks for large and small firms have diverged in recent private forecasts. As always, we welcome any comments or feedback you may have. Sincerely, Mark Zoff Director of Research DAVID HALE GLOBAL ECONOMICS INC. 546 Lincoln Ave #2A Winnetka, IL, 60093 Tel: 847-386-6009 Fax: 847-386-6011 Mob: 651-334-1852 E-mail: markzoff@davidhaleweb.com Website: www.davidhaleweb.com We are pleased to announce that What's Next: Unconventional Wisdom on the Future of the World Economy, a compendium of economic forecasts from pre-eminent independent economists, is available for purchase. Copyright 2011, David Hale Global Economics Inc. All rights reserved. Please do not forward the attached document to individuals not authorized by David Hale Global Economics to receive it. It contains confidential information and is intended only for the individual named. This document is not for attribution in any publication, and you should not disseminate, distribute or copy this e-mail without the explicit written consent of David Hale Global Economics. Did Small Business Depress the June Employment Report? July 11, 2011 • Volume 08.09 By David Hale The US labor department produced an employment report for June which was surprisingly weak for the second month in a row. There was a gain of only 18,000 jobs after a disappointing gain of 25,000 jobs during May. The forecasting community had been expecting a gain of over 100,000 jobs. The non-seasonally adjusted job gain was 840,000 as hiring always expands in June, but as in 2010 the seasonal adjustments produced only a token increase. Surveys about large employers have recently been more positive about job creation, but the small business sector continues to be very cautious about new hiring. There was broad-based weakness in the June labor market report and the diffusion index fell to 53.4 from 65.2 in April. There were no large job losses during June. The gains were simply very modest. The private service sector created only 53,000 jobs compared to 198,000 during April. The manufacturing sector added 6,000 jobs compared to 28,000 in April. There was another small decline in temporary employment for the third month in a row. The construction sector also shed 9,000 jobs. The weakest sector was once again state and local governments. They shed 25,000 jobs after losing 46,000 during May. They have lost 142,000 jobs this year. The household measure of employment fell by 455,000 after a gain of 105,000 during May. The workweek eased to 34.3 hours from 34.4 hours during May and April. The manufacturing workweek eased to 41.4 hours from 41.5 while the service sector workweek edged up to 32.4 hours from 32.3 hours. Average hourly earnings eased to $19.41 from $19.42, but remain above the $19.37 level from April. The unemployment rate nudged up to 9.2% from 9.1%, while the U-6 unemployment rate, which includes people who have given up looking for a job and part-timers who want full-time work, shot up to 16.2% from 15.8%. The average duration of unemployment hit an all-time high of 39.9 weeks. The job creation of the past twelve months appears modest because there were job losses during the recession of 8.75 million. Nonfarm payroll employment fell by 6.3% compared to a decline in real GDP of 4.1%. Such job losses were unprecedented. During the severe recessions of 1974-75 and 1981-82 the economy’s employment declines were 2.8% and 3.1%. They were also followed by buoyant employment gains of 2.83 million and 3.45 million during the first year of the recovery during 1975-76 and 1983 respectively. The current recovery has been more analogous to the modest rebounds which followed the 1990-91 and 2001 downturns. In the 1991-92 recovery there were job gains of only 475,000 after one year. In the 2001-02 recovery, there were no job gains until 2003. The employment trough occurred in August 2003, and the job gain during the year which followed was 1.79 million. The job gains during the past year have been broad-based. The largest gain since 2009 has been in business services with growth of 785,000 jobs. The retail sector has added 189,000 jobs since late 2009. The manufacturing sector has added 251,000 jobs since the trough, and thus has significantly outperformed the last two cycles. In 1992-93 and 2002-03, there was no upturn of manufacturing employment. Manufacturing now accounts for only 8.9% of US nonfarm employment compared to over 13% in 2000 and just under 26% in 1970. Firms were cautious about hiring during 2010 because of uncertainties about both the economy and public policies affecting taxation and healthcare. They therefore added 310,000 temporary employees. During the past three months, however, temporary employment has fallen. As a result of the failure of the housing sector to recover, there has been no meaningful upturn in construction employment despite the fact that over two million jobs were lost during the recession. Developers have low inventories, so if there is a sustained upturn in home sales, they could easily add a few hundred thousand jobs. But at the current time distressed properties are accounting for 40% of home sales. The financial sector has also lost 78,000 jobs since the trough in private sector employment. The economy’s weakest sector is state and local governments. They have lost 577,000 jobs since the peak in August 2008, and have shed 142,000 jobs during the past six months. The state and local government sector is facing a $103 billion deficit in fiscal 2012. The federal government provided significant aid during fiscal years 2009, 2010, and 2011. But in the new fiscal year starting this month, this aid will decline from $59 billion to only $6 billion. As a result, the state and local government sector could lose an additional 250,000 to 300,000 jobs this year. Some private sector employment surveys suggest that the government data for May and June may be understating the labor market’s resilience. The Business Roundtable surveyed its members about their hiring intentions from mid-May to early June. The report found that 51% of firms plan to increase hiring while only 11% will increase layoffs. The Manpower Employment Survey projects that 20% of firms will increase hiring during the third quarter while 8% will decrease it. When seasonally adjusted, the net employment outlook becomes +8% compared to +6% at this time last year. There are more than 18,000 companies in the Manpower survey. Large companies have been more positive than small firms because they are sharing in the export boom which has occurred since 2009, but the recent weakness of the economy has dented the confidence of large companies. The Conference Board’s CEO Confidence Survey fell from 67 in the first quarter to only 55 during the second quarter. Only 40% of the executives in the survey said that conditions were improving compared to 61% during the first quarter. Despite this pessimism, 70% of chief executives expect to boost profits in the year ahead through a mixture of sales gains (57%) and cost cutting (20%). The National Federation of Independent Business has been pessimistic about job creation in the small business sector. Its confidence index has been declining since March. Its report in early July said “Small business owners reported job losses in June averaging 0.23 workers per firm, a seriously bad performance after 4 months of positive gains. Seasonally adjusted, 9 percent of the owners added an average of 2.8 workers per firm, but 16 percent reduced employment an average of 3 workers per firm. The remaining 75 percent of owners made no net change in employment. Not seasonally adjusted, manufacturers added an average of 1.1 workers per firm, but job losses were posted by firms in financial (-.1 workers) and non-professional services (-.23 workers) and in construction (-.23 workers) that overwhelmed the few gains posted.” This is a very weak reading for a recovery period. The ADP National Employment Report, by contrast, has been far more positive on small business job creation. In April, it reported that employment rose by 84,000 jobs for companies which employ fewer than 50 workers as well as for firms employing 50-499 workers. The small business job gains dipped to only 27,000 during May, but rebounded to 88,000 during June. Large firms, by contrast, added only 10,000 jobs during June. The US Chamber of Commerce has just conducted a survey of small business which was also pessimistic about new hiring. The survey found that 64% of small business executives do not plan to hire in the year ahead while 12% plan to cut jobs. The Chamber’s survey covered 1,409 executives in companies with less than $25 million in sales. The Kauffman Foundation has just released a report showing that there has been a substantial decline in job creation by small business during recent years compared to the 1990s. Citing data from the US Census Bureau, the study found that the number of new employer businesses has fallen 27% since 2006. The study also examined young companies’ size at birth, jobs created, and the survival patterns of new firms. The study found that historically new firms in the US have created about three million new jobs each year, but recent cohorts have performed much worse, creating just 2.3 million new jobs in 2009. Data from the BLS indicate that during the 1990s startup firms began with 7.5 employees compared to 4.9 today. The Kauffman report suggests that structural factors are retarding small business job creation, not just employer concerns about taxation, health care costs, and the business cycle. In early 2011, there was an upsurge of confidence among economists that output growth might reach 4.0% this year because o f monetary and fiscal stimulus. The first quarter growth rate dipped to 1.9% because of cuts in government spending. The second quarter growth rate may be only 2.0% because of component shortages for Japanese auto manufacturers and the impact of rising oil prices on consumer spending. In 2010, employment growth dipped to only 48,000 jobs and 65,000 jobs during May and June from 229,000 during April. It then began a gradual recovery to 110,000 jobs gains in August, 143,000 in October, and 167,000 in December. Employment could follow a similar pattern during 2011 if the economy can recover from the headwinds which depressed both demand and output during the second quarter. In June, there was an uptick of retail sales and durable good orders which suggests that demand is recovering. The auto industry is planning large gains in output during the third quarter. These factors suggest that real GDP growth could increase by over 3.0% during the third quarter. The new risk is fiscal drag. The Obama administration is projecting the tax share of GDP could rise by 2.2% next year as the Social Security tax cuts and accelerated depreciation allowances that were enacted in December 2010 expire. It is also projecting that the spending share of GDP could decline by 1.7% as various stimulus programs enacted in early 2009 unwind. The Republicans are demanding even larger spending cuts as part of the negotiations over the debt ceiling. These factors suggest that US output growth during the next two years may be only 2.0%-3.0%. If output growth is that subdued, the economy’s job gains may be only about 150,000 per month as large employers respond to gains in exports and capital investment while small firms remain cautious. In 2007, 35% of the American labor force was employed by firms with fewer than 100 workers while over 50% were employed by firms with more than 500 workers. There can be a recovery without small business, but it will leave the unemployment rate above 7.0% for another three or more years. ________________________________________ ©2011 David Hale Global Economics, Inc All rights reserved. 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