August Jobs Report—Manufacturing Slowdown

Popular Economics Weekly

The headlines said a “weak” job report on Friday. But it had nothing to do with politics or economic policy, at least directly. The jobs drop was all in manufacturing due to problems in Europe and China. So it’s really up to consumers to continue to open their pocketbooks over the holidays to keep this economy going, and that is happening to some extent.

But indirectly, government payrolls are still shrinking. And government investment as well as consumer spending are the twin engines of economic growth these days, which is the major reason we have 2 percent, instead of 3 percent GDP growth at this stage of the recovery.

There were just 96,000 payroll jobs added in August, with 103,000 private sector jobs added, and 7,000 government jobs lost. A meager total much below the first part of the year. The unemployment rate decreased to 8.1 percent (from the household survey), and the participation rate declined to 63.5 percent, mostly from the decline in manufacturing employment, which depends on exports which have flagged of late.

Graph: Calculated Risk

This can be traced to both the European recession, since 25 percent of U.S. exports go to Europe, and China’s growth slowdown. Manufacturing had been leading the recovery until now. But the service sector has taken over, with 119,000 service sector payroll jobs added and 15,000 manufacturing jobs lost in August; half of which were auto manufacturing that will spring back in the fall. And since the service sector accounts for 70 percent of total nonfarm payrolls, this means consumers are spending again, which is enough to keep us out of another recession.

So the economy has added 1.11 million jobs over the first eight months of the year (1.21 million private sector jobs), according to the Bureau of Labor Statistics. At this pace, the economy would add around 1.8 million private sector jobs in 2012; less than the 2.1 million added in 2011. Also, at this pace of payroll job growth, the unemployment rate will probably still be above 8 percent at the end of the year, says Calculated Risk.

The August ISM Non-manufacturing index for the service sector was at 53.7 percent, up from 52.6 percent in July. The employment index increased in August to 53.8 percent, up from 49.3 percent in July. Note: Above 50 indicates expansion, below 50 contraction.

Graph: Calculated Risk

Meanwhile, manufacturing has been slowing and until it picks up again the service sector will be the main engine of growth. The outlook for the nation's manufacturing sector is increasingly going into reverse based on the ISM's report where new orders, at a sub-50 level of 47.1 in August, show their third straight monthly contraction and at the deepest rate since April 2009. New export orders are definitely part of the problem, at 47.0 for what is also the third straight month of contraction. Manufacturers, as they wait for new orders to return, are increasingly drawing down their backlogs which are at 42.5 for the fifth straight month of contraction.

Graph: Econoday

This is no coincidence, as the EU economy is back in recession, having contracted in the second quarter—April to June. And with the German and Nordic countries insisting on more austerity for Spain and Italy, it’s third and fourth largest economies, economic contraction will continue, putting more downward pressure on manufacturing. The two bright spots are in transportation—domestic aircraft and vehicle manufacturing—which are surging.

So the economic news is mixed, with consumers continuing to spend, retail sales up, but exports down. This will boost certain sectors, mainly the consumer sectors in the service industries. But given that employment in private service-producing industries is currently 93,496,000 vs. just 18,744,000 in private goods-producing sector (i.e., manufacturing) when seasonally adjusted, the hurt in Europe in particular won’t cramp overall growth.

However, the bottom line is that we need more stimulus spending, in part to help states rebalance their budgets. The debt problem will take care of itself, because any job creation programs at all will increase the demand for goods and services, which in turn increases tax revenues. Austerity is not the answer with U.S. or in Europe when the unemployment rates are so high. The consensus among economists is that our unemployment rate has to drop below 6 percent to come anywhere near the 3.25 percent ‘trend’ growth of recent years that would bring back prosperity. But without a Congress willing to act on job creation, this won’t happen.

Harlan Green © 2012