October 07, 2011

Economics Group

John E. Silvia, Chief Economist

john.silvia@wellsfargo.com (704) 374-7034

Employment: Job Gains Reduce Odds of a Double Dip

A gain of 103,000 jobs is consistent with the subpar outlook for real GDP and personal income growth for the second half of this year, but not a double dip. Unemployment rates indicate continued structural issues. Job Gains Consistent with Subpar Economy In September, jobs were up 103,000, with an average gain of 96,000 over the last three months. Job gains were centered in professional services, education & health, information and construction. Surprisingly to some, construction jobs have averaged plus 10,000 over the last three months. Local governments continue to shed jobs. Contrary to popular wisdom, the modest gains in the labor market are not inconsistent with the rest of the economy. Labor is a derived demand from the demand for goods and services, so with subpar aggregate demand the hiring of workers will be weak as well. As evidenced in the top graph, the current recovery continues to generate far fewer jobs than many expected and far fewer than at this point during the 1990 and 2000 expansions. The ongoing underperformance of job gains reflects a longer-term structural change in what and how we produce goods and services in America. Unemployment Puts Downward Pressure on Average Earnings Average hourly earnings are up just 1.9 percent year over year (middle graph). Moreover, on the demand side, the cost of labor for firms is far more than wagesit is the cost of benefits, especially the uncertain future cost of health benefits, that limits the hiring of workers as the wedge between what labor costs (wages plus benefits) grows relative to the takehome pay of workers. Meanwhile, for workers, the pace of consumer price inflation exceeds the gain in wages and thereby suggests weaker real takehome pay and thus continued weakness in real consumer incomes and discretionary spending. On the demand side, firms are reluctant to hire and are desperate to keep costs down in the face of weak final demand for products and services. Meanwhile, the many unemployed who are seeking a job are limited by skills and mobility issues. Hours Worked: Continued Subpar Economic Growth Over the past three months, aggregate hours worked has been flat and thereby suggests a continued weak economic growth outlookno acceleration here. As a proxy for labor input into production, hours worked, when combined with an estimate of productivity, gives a rough gauge of total output growth (bottom graph). The recent minimal improvement in hours worked supports our view that economic growth in the second half of this year will be subpar and a disappointment to many. Our outlook is for 1.5 to 2.0 percent economic growth in the second half of this year, with contributions from consumer spending, business investment and residential and nonresidential construction. This does not improve the outlook for jobs as our unemployment rate estimate remains above 9 percent in this period.
12%

Job Growth
8% Year-over-Year Percent Change 8%

4%

4%

0%

0%

-4%

-4%

-8%

-8%

-12%

-12%

-16%

Construction Employment: Sep @ 0.7% Manufacturing Employment: Sep @ 1.7% Service Employment: Sep @ 1.1% 89 91 93 95 97 99 01 03 05 07 09 11

-16%

-20%

-20%

Unemployment and Wage Rates

Seasonally Adjusted 12%

10%

10%

8%

8%

6%

6%

4%

4%

2% Unemployment Rate: Sep @ 9.1% Hourly Earnings - YoY % Chg.: Sep @ 2.0% 0% 65 70 75 80 85 90 95 00 05 10

2%

0%

Index of Hours Worked

8% 3-Month Annualized Rate of 3-Month Moving Average 8%

4%

4%

0%

0%

-4%

-4%

-8% Good Proxy for GDP plus or minus Productivity Index of Hours Worked: Sep @ 0.9% -12% 93 95 97 99 01 03 05 07 09 11

-8%

-12%

Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg John E. Silvia, Ph.D. Mark Vitner Jay Bryson, Ph.D. Scott Anderson, Ph.D. Eugenio Aleman, Ph.D. Sam Bullard Anika Khan Azhar Iqbal Ed Kashmarek Tim Quinlan Michael A. Brown Joe Seydl Sarah Watt Kaylyn Swankoski Global Head of Research (704) 715-8437 & Economics (212) 214-5070 Chief Economist Senior Economist Global Economist Senior Economist Senior Economist Senior Economist Economist Econometrician Economist Economist Economist Economic Analyst Economic Analyst Economic Analyst (704) 374-7034 (704) 383-5635 (704) 383-3518 (612) 667-9281 (704) 715-0314 (704) 383-7372 (704) 715-0575 (704) 383-6805 (612) 667-0479 (704) 374-4407 (704) 715-0569 (704) 715-1488 (704) 374-7142 (704) 715-0526 diane.schumaker@wellsfargo.com john.silvia@wellsfargo.com mark.vitner@wellsfargo.com jay.bryson@wellsfargo.com scott.a.anderson@wellsfargo.com eugenio.j.aleman@wellsfargo.com sam.bullard@wellsfargo.com anika.khan@wellsfargo.com azhar.iqbal@wellsfargo.com ed.kashmarek@wellsfargo.com tim.quinlan@wellsfargo.com michael.a.brown@wellsfargo.com joseph.seydl@wellsfargo.com sarah.watt@wellsfargo.com kaylyn.swankoski@wellsfargo.com

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