November Economic Advisory Note

Economic Advisory Note

Eric Price-Glynn, Manager, Research & Analytics

Tuesday, December 07, 2010

Reviewing Friday’s  weak government employment situation report, I want to and would say “Bah humbug”!  Save for the positive trends indicated by other reports, in particular the ADP employment report released earlier in the week, it would look like a lousy situation indeed.

The government partially squashed happy holiday hopes of continued employment recovery created by October’s more positive employment report and subsequent positive releases by ADP and others. The job gains in October – initially reported as 150,000+ were actually revised slightly upward to 170,000+ but that is about where the holiday cheer ends as far as the government data are concerned.

The labor economy rests near “the bottom” reached in 2009 with over 20 million un- or underemployed, vast underutilization of resources, house prices – hence wealth-driven consumption, again on the decline, and a global flight to the dollar as a safe-haven currency working against growth driven by US exports. Add in that theatrics over deficit and matters of no economic consequence such as a federal employee pay freeze – not reducing unemployment – have grabbed political center stage, and the end of the year brings seemingly little to cheer about in general as the broad labor economy meanders into an uncertain 2011.

But there is some positive news from other corners, consistent with our forecast of an economic recovery beginning to take hold in the 2^nd and 3^rd quarters of 2011.

This news comes from that “other” employment report this week, produced by ADP (Automatic Data Processing, Inc, one of the world’s largest payroll outsourcing firm).

Most importantly, the ADP report tells a somewhat different story, in particular for small business. Small businesses (with <50 employees) have added an estimated 200,000 jobs this year – more than half of them in the last three months , with the overwhelming majority of gains coming in the service sector. While monthly job gains in the range of 200-300,000 in small business are truly what are needed to cement the recovery, the continued trend of monthly job growth over the last 4 months could reach that pace of growth as early as July or August 2011—more likely the end of the year—provided the cross- and head-winds mentioned above (or some new negative shock) don’t divert the recovery.

In general, the 2011-2013 recovery in commercial lines premiums from the awful reality of the last three years, hinges on sustainable payroll and revenue growth—especially among small commercial insureds, which through the first quarter of 2010 were still cutting jobs. Here’s hoping the positive trend of the last 6-9 months continues!

So this month’s mix of good and bad:

Employment:

·         Overall, only 39,000 jobs were added in November – less than half the average job growth to date in 2010, and far below the rate at which a recovering economy would be expected to absorb a labor force if it were growing at a healthy, recovering trend. This is simply not anywhere sufficient job growth to sustain a recovery.

·         The unemployment rate rose to 9.8 percent; expect it to rise further before it falls, as unemployed workers restart active job searches, many of them re-entering the labor force for the first time in years.

·         Classes with more than 500,000 employees and significant year-over-year job growth momentum include:

o   Mining & mining support services: up 13 percent over the year

o   Primary and fabricated metals: up 4.7 percent over the year

o   Motor vehicles and parts: up 4.2 percent over the year

o   Temporary help services: up 14 percent over the year

o   Home health services: up 4.1 percent over the year

Payrolls:

·         In nominal terms payrolls have returned to exactly the level of 2007. Factoring in inflation, payrolls are still well below the 2007 level.

·         Sector differences are substantial:

o   Healthcare and education continue to lead the pack out of the recession, with payrolls 14 percent above 2007 – or about 8 percent higher in real terms. However on a month-over-month basis, payrolls were flat.

o   On the flip-side, construction and manufacturing payrolls are still only 80 and 92 percent of their 2007 levels, respectively – and 6 percent worse in inflation-adjusted terms.

Overall,  a mixed picture for the labor and broader economy moving into 2011, with some bright spots, in particular the gathering strength of job creation in the small commercial sector.

Happy Holidays and New Year!