July 10, 2006

Inside the Labor Report

Friday's labor report was a bit of a disappointment. For the third month in a row, the total number of jobs created came in well below 150,000, the level generally believed necessary to keep pace with a growing population. However, the really bad news was not the number of jobs gained, but the type of jobs that are now being lost.

After the Nasdaq crash a few years ago, when interest rates were dropped to generational lows and mortgage lending standards were gradually relaxed to the point where anyone who could fog a mirror could get a home loan, construction employment boomed.

Back in 2003, after the first wave of refinancing mania swept the country and housing prices began their dramatic rise, a construction jobs boom was kicked off - one that lasted for nearly three years. That is, until the second quarter of 2006 which saw the fewest number of construction jobs created since the first quarter of 2003, and where in the most recent month, construction employment declined.

As shown in the chart below, as housing prices were rising during the last few years and construction jobs were plentiful, retail employment also boomed. Many of the new construction workers needed to unload their hard earned cash and equity-rich homeowners similarly spent money, albeit money that came with much less effort.

But in the most recent quarter, this dual construction/retail jobs boom seems to have come to an abrupt end. Both categories were net losers for the month of June, and when looked at on a quarterly basis above, the situation in retail employment now seems dire.

Construction employment may soon follow.

The declines in retail employment have been broad based - nearly every sub-category has declined in the first half of the year, as higher interest rates and higher energy costs have apparently taken a toll on the great locomotive of global growth - American consumption.

The construction employment situation in recent months has been a bit different however. As shown in the chart below looking back over the last three and a half years, there has recently been a change in leadership, where residential construction job growth has given way to non-residential construction employment.

During the period from 2003 to 2005, the combined sub-categories of residential construction and residential specialty trade accounted for between 150,000 and 200,000 new jobs a year. In the first half of 2006, these two have accounted for a mere 20,000 new positions and the trend does not appear to be favorable for the second half of the year.

Non-residential construction and specialty trade employment has picked up the slack somewhat in recent months, presumably some of this attributable to the Gulf Coast rebuilding effort. Given current trends however, it seems unlikely that for the construction category as a whole, there will be much good news over the next two quarters. Employment in this area may in fact turn negative for some time, as it did back in 2001 and 2002 (see first chart).

Last month, 121,000 new jobs were created, led by government with 31,000 and education and healthcare services with 26,000. Job creation in professional and business services was not far behind with 25,000 new spots - about 10,000 new accounting and computer system jobs to go along with 9,000 positions in administrative support - the lone bright spot in the most recent report.

It is not at all clear how the jobs picture will evolve from here, but the impact of the housing boom on both construction and retail trade employment over the last few years will probably be best appreciated in retrospect.