Finally Some Relief on the Jobs Front

Friday's employment data provided more evidence that the U.S. may have already seen the worst of this recession. For the last few months, I have been emphasizing positive indicators including real hourly wage growth, the ISM purchasing managers' surveys, consumer spending data, and initial unemployment statistics. I have remained confident in my belief that employment was a lagging indicator. But I must admit even I was growing a little concerned that the employment data couldn't manage some meaningful improvement over the past several months.

Today's number may have finally burst the dam, with job losses of only 345,000 versus the more typical 600,000 losses of the past six months. And unlike April (which was revised to a better loss of 504,000), there was no funny business from the government hiring of census workers to help the numbers in May. In fact, every sector except information processing and durable goods manufacturing showed a smaller percentage decline than the previous month. The job loss figure was also considerably better than the general consensus for a loss of over 500,000. It is now about half of January's peak level of 741,000 job losses.

As I have continuously warned, the unemployment rate increased in May, as 350,000 applicants flooded the job market, boosting the rate to 9.4% from 8.9% the previous month. If it had not been for the rush of new job seekers (who now see opportunities), the rate would have crept up to somewhere in the 9.1%-9.2% range, more in line with Wall Street's expectations. It is actually a positive sign to see unemployment move up because of new entrants, as this indicates increased confidence in the economy. If this is anything like a typical cycle, it will probably be at least another three months before this number peaks at something very close to 10%.

In other good news on the employment front, productivity in the first quarter was revised upward. Productivity has remained very high during this recession, especially in the services sector. This suggests that employers may have actually laid off workers prior to real losses in business; when business comes back, they may have to hire new workers sooner than many are currently expecting.

The purchasing managers' survey for May, reported on Monday, also provided some welcome good news. For the first time in months, the number of companies reporting increased orders was greater than those reporting declining orders. The improvements were broad based, with 50% of the industries reporting improvements. Both the overall index, which includes many components, and the very predictive new orders portion exceeded Street expectations by a wide margin. This indicator has been one of the most reliable and earliest indicators of economic change. Unfortunately, some of the longer-than-normal auto industry shutdowns planned for this summer could play havoc with this indicator over the next couple of months. As an alternative, I will probably keep a closer eye on auto sales and inventories over the summer as leading indicators.

Overall, these numbers are positive and raise the probabilities of seeing a V-shaped recovery. However, auto industry shutdowns along with dealership and brand eliminations are going to seriously mess with the numbers this summer. The other big worry is that higher interest rates slow things down a bit, too. In the short run, I don't believe rates will go a lot higher, and I think we can probably survive with rates where they are now.