Another winter of hope, another spring of disappointment. With just 115,000 new jobs, and a drop in the unemployment rate driven entirely by people leaving the workforce (the household survey actually showed job losses for the second month in a row), the April jobs number disappointed even low expectations. After multiple years of spring slumps and constant revising up of previous months, it bears discussion of whether the seasonal adjustments done by BLS need to be updated.
Regardless of the statistics, the political implications are interesting. If trends continue, the White House will likely be able to point to an unemployment rate below 8 percent by Election Day. Consider this: over the past year, labor force participation has dropped by 0.6 percent, the equivalent of about 1.4 million people dropping out of the workforce (or not entering in the first place). If that trend were to continue, we’d need just 64,000 jobs per month to break 8 percent by…
Coming off a winter full of good economic news, the market was willing to look past a host of risks. As employment gains continue to lag and other economic indicators do more to muddy our perception of the economy, the market will turn its focus to the uncertainty surrounding upcoming events.
Even as these external risks present political challenges for the President, the unemployment rate will likely fall below or somewhere around 8 percent as we move into the latter-half of 2012. If participation rate stays at 63.8 percent, the President only needs 176,000 jobs per month to get below 8 percent.
Despite its continued progress, here are a few of the upcoming risk factors:
Recession in Europe – Restructuring of debt and newly imposed austerity measures are acting counterproductive to their stated goal, killing prospects for growth. With further downgrades of sovereign debt, the rest of 2012 will be a roller-coaster ride for EU member countries and the
Merger activity in the banking sector faces a fundamental tension in the years to come: new regulation has made efficiency gains from mergers more attractive; and at the same time, regulatory scrutiny of mergers has increased, especially for larger firms. The implication of this dynamic is that firms that are better able to navigate public scrutiny and the regulatory approval process for mergers will be at a strategic advantage versus their competitors.
We expect an increase in mergers due to incentives in economies of scale and increased regulation:
Operating efficiency and profitability favor large firms by 49 and 75 percent, respectively.
Increased regulation disproportionately hurts smaller firms, as they have historically seen higher compliance costs than their larger peers.
Consolidation will continue on its historical trend, as there were over 7,500 FDIC-regulated banks as of 2011, compared to roughly 9,700 just 10 years prior.
The March payroll report gives us very little to celebrate. The economy added only 120,000 jobs in March, 80,000 below expectations. Surprisingly in the household survey, the overall number of jobs actually fell by 31,000. And while the unemployment rate dipped to 8.2 percent, this was only due to a drop in labor force participation. The March payroll report adds to the toppling evidence that the current recovery is fragile and will up the pressure on the Federal Reserve to take action.
One explanation for the disappointing swing in jobs may be a result of weather-related affects on the January and February numbers as we noted earlier this week. Seasonal adjustments may have inflated in prior months due to warm weather boosting job creation in seasonally sensitive sectors. The construction and retail industries, two sectors very sensitive to weather patterns, lost over 40,000 jobs collectively in March.
However, just as the previous two months may not have been as strong as we…
By Matt McDonald, (202) 822-1205, mmcdonald@hamiltonps.com
A new economic discipline seems to have emerged over the past several months: econometeorology, the explanation of the economy through weather patterns.
Each month, jobs numbers are adjusted to account for seasonal variations. For example, there is typically a spurt of temporary hiring during the holiday season in retail, and there is typically a slowdown in construction over the winter months as snow and inclement weather prevent work. The seasonally adjusted number that we see every month helps smooth out those variations to make an apples-to-apples comparison of how the economy is doing. The effects of these seasonal adjustments can be seen in the chart below.
In the context of this seasonality, economists have been looking at this year’s warm winter. Goldman Sachs has estimated that the warm weather added between 50,000 and 70,000 jobs to the January number. If this proves to be the case, we would expect to see an overestimation of jobs growth in the winter, with a return to the “normal” slightly lower trend…
