Labor Market Cuts 63,000 Jobs

March 11, 2008--In February, employers cut 63,000 jobs, fueling fears of a recession. The ISM retreated in February, thus, manufacturing activity is contracting. Factory orders fell as firms pulled back on capital expenditures, while productivity growth continued in the 4th quarter. Some relief may be at hand in the housing market, as the index for pending home sales remained steady from December to January.

 

Employment Situation
The labor market shed 63,000 jobs in February, following a downwardly revised 22,000 job loss in January. February's loss, coupled with the poor numbers from January, surprised analysts and provided further evidence that the economy may be entering a recession, if it's not already in one. Manufacturers and builders slashed payrolls by 89,000 workers. Governments added to their payrolls (38,000), as did the service sector (26,000), and the financial industry faced declines. Average hourly earnings increased slightly to $17.80, a 0.3% uptick. Lastly, while the unemployment rate declined 0.1% to 4.8%, the number of discouraged workers increased and fewer people actively participated in the labor market.

 

ISM Index
The Institute for Supply Management's Purchasing Manager's Index (PMI) declined in February to 48.3, decreasing 2.4 points from January's PMI of 50.7. With the PMI well below 50, manufacturing activity is now at the level of contracting. Though forward-looking indicators weakened, they did not fall significantly from January, signally a shallow contraction. Specifically, new orders fell .04 points to 49.1, but backlogs increased to 45.0 from 44.0. Production plummeted 4.5 points to 50.7. In the early stages of production, inflation remains a concern as prices paid fell an insignificant 0.5 points to 75.5. If current conditions hold, analysts expect the ISM to remain between 45 and 50 during the first half of the year.

 

Factory Orders
As expected, factory orders fell 2.5% in January after a downwardly revised 2.0% increase in December. A 5.1% decrease in durable goods led the overall fall in factory orders. Orders for core capital goods, which are a proxy for business investment spending, remained steady for the month. Furthermore, shipments rose by 1.1%, while inventories increased by 1.3%. Unfilled orders grew 0.7% for the month. January's decline in factory orders may be seasonal, as firms typically spend on capital expenditures before the first of the year.

 

Productivity and Costs
Nonfarm business productivity increased 1.9% (SAAR) in the 4th quarter, though better than expected, the 3rd quarter witnessed an increase of 6.3%. On a year-ago basis, productivity increased 2.9%--the strongest year-over-year gain in three years. After its largest decline in four years, unit labor costs rose 2.6%, surpassing expections, while on a year-ago basis, unit labor costs are up 0.9%. Surging labor costs add to existing pressure on prices, increasing the possibility of inflation. However, given the general weakness in the economy, inflationary pressures from the labor market poses no threat, thus reducing near-term inflation.

 

Pending Home Sales
In January, the index for pending home sales remained at its December level of 85.9, signaling that the housing market may be stabilizing soon. Compared to a year ago, the index lost 19.6% of its value. Potential homeowners may begin to re-enter the market as prices are low and supply is plentiful. However, a continued shortage of credit and general unease over the future of the economy may hinder potential buyers.