A Very Recession-Like Employment Report

The unemployment rate jumped 0.4 percentage points to 6.1 percent in August, which is the highest it has been since September 2003. Legislative changes may be causing the unemployment rate to be slightly overstated but there is no denying the labor market is deteriorating. Nonfarm employment fell 84,000 during the month.

Extended Unemployment Benefits May Be Boosting The Jobless Rate

The unemployment rate jumped 0.4 percentage points in August, which was much worse than expected. The increase results from a 342,000 job drop in household employment and a 250,000 person rise in the civilian labor force. While the household numbers move around quite a bit, the recent increase in the labor force looks suspicious. The labor force normally declines when labor market conditions deteriorate. The extension of unemployment claims benefits may be causing a larger number of people than usual to state they are unemployed because this allows them to receive extended benefits. Jobseekers may also be lengthening their job search a bit. If the labor force had remained unchanged in August, the unemployment rate would have risen just 0.2 percentage points to 5.9 percent.

There Is No Question The Economy Is Weakening

Even if the unemployment rate is overstated, there is no denying that labor market conditions are deteriorating. Nonfarm employment declined by 84,000 jobs in August and data for the past two months were revised lower by a combined 58,000 jobs. Employment has now declined for 8 months in a row, producing a cumulative loss of 605,000 jobs.

Job losses appear to be fairly broad based, with nearly every major category reporting a new job loss in August. The biggest decline was in manufacturing, where 61,000 jobs were lost. Construction payrolls declined by 8,000 in August, with modest job gains in nonresidential categories offsetting still substantial cutbacks in residential construction.

Service-providing industries eliminated 27,000 jobs in August, with the largest declines occurring at employment staffing companies and retail trade. The only bright spots were health care and education, which combined to produce a net gain of 55,000 jobs in August. Government payrolls also rose modestly, climbing by 17,000.

While the broad employment categories were mostly negative, the BLS' diffusion indices rose in August. The overall diffusion index rose 7.5 points to 48.9. A reading of 50 means that an equal number of industries increased and decreased employment. The manufacturing diffusion index rose 9.9 points to 38.7.

The bottom line for the Fed is the domestic economy remains extremely weak. By our calculations, final domestic demand during the second half of this year will be the weakest it has been since the 1981/82 recession. It only makes sense the employment figures reflect this weakness. This means the Fed will likely remain on hold for quite some time and that the Fed's next move will likely be to cut short-term interest rates.

Wachovia Corporation
http://www.wachovia.com

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