Research

Podcast: Could construction revitalize job growth?

Last week's job growth report indicated that some 89,000 jobs were added to the economy nationally in August, and another 110,000 in September. That means the average monthly job growth for 2007 will hover around 125,000 per month — down from the 160,000 average in 2006 and 175,000 in 2005. Non-residential construction remains strong, however, and if residential construction picks up as most analysts predict, next year could be better. Regional forecaster Lee McPheters — professor of economics, senior associate dean and director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business — takes a deep look at the numbers.

2007-10-10

Last week's job growth report indicated that some 89,000 jobs were added to the economy nationally in August, and another 110,000 in September. That means the average monthly job growth for 2007 will hover around 125,000 per month — down from the 160,000 average in 2006 and 175,000 in 2005.

Non-residential construction remains strong, however, and if residential construction picks up as most analysts predict, next year could be better. Regional forecaster Lee McPheters — professor of economics, senior associate dean and director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business — takes a deep look at the numbers.

Transcript:

Knowledge: The September jobs report showed that the nation's unemployment rate edged up to 4.7 percent from 4.6 percent in August. But the more spectacular news is that economy created 110,000 jobs in September. Even more dramatic, the U.S. Bureau of Labor Statistics revised its August payroll estimates to show a gain of 89,000 jobs instead of a net loss of 4,000.

Here to talk about the report and what it means to the national and state economy is Lee McPheters, professor of economics and senior associate dean of the W. P. Carey School of Business. What does the monthly job growth report tell us about the economy, and why does this influence Wall Street so strongly?

Lee McPheters: Job growth is important for a number of reasons. First of all, it's a source of income for consumers. Consumers make up two-thirds of the economy, so there's a real strong connection between consumer confidence, consumer spending, and the overall health of the employment market. In terms of indicators, job growth has a few things going for it that are really useful for analysts and Wall Street as well.

First of all, it comes out every month. Now, the numbers are revised, but nevertheless they come out on a very regular basis. And it's not really a complex sort of concept: a job is a job, and this is what is reported by the Department of Labor. It included full-time, part-time jobs, and there are some issues related to the size of the labor force and whether people are moving in and out and these sorts of things.

But basically it's a very steady flow of information about how well the economy is doing in terms of just creating jobs and, by extension then, creating income. Now, the Federal Reserve, obviously, paid a lot of attention to this during the recent deliberations about the latest rate action. And I think that really that negative 4,000 figure for the August job creation — an actual loss of 4,000 jobs — really pushed the Federal Reserve into such a sizeable rate cut.

Knowledge: But then we found out that the jobs were up in August after all. Is this type of a revision unusual?

McPheters: The background on how these numbers are compiled is sort of a whole area of study in and of itself. It's a survey process, and they do not get 100 percent response to the survey. And further, they allow the respondents up to three months to really get the final numbers in. There's the first go-round, the second go-round, and the third go-round.

And by the end of that final revision, they still only have about 85 percent of respondents. So, it is almost certain that whatever number is released is going to be revised, and that typical revision — just sort of ballparking — would be somewhere around 30,000 per month, and it could be up or it could be down. When the economy is expanding, it's typically up. And when the economy is slowing, like it is right now, sometimes it's up and sometimes it's down.

But this was a particularly large revision. You had a negative report — you'd lost 4,000 jobs — and then all of the sudden in the next release, jobs are up by 89,000. So, that's a 93,000 job reversal. But we seem to see something about that size just about every year. In fact, about a year ago at this time there was a revision of about 100,000 as well.

Knowledge: So, looking at the September report, does that point toward an economic slowdown?

McPheters: The September number was 110,000 jobs created compared to August, so it's up by 110,000. And that is pretty much on track with what most analysts and observers had expected.

Now, to get kind of a frame of reference, all through 2006, if you just sort of average out those monthly job reports, the average increase was about 160,000 jobs. And then the year before that, 2005, the average was a bit higher, about 175,000 jobs. And there were some spikes in there in some months of 200,000 to 300,000 new jobs created in a month.

So, now we have the September numbers of 110,000, and for all of 2007, then, that puts us at an average of about — and I'm just estimating here — about 125,000 jobs per month so far this year. You can see that there is, in fact, a kind of a much slower performance by the labor market, but at the same time, the job losses have been reversing and we're not looking at job losses so far for 2007.

Knowledge: So, what parts of the economy are gaining jobs, and what parts of the economy are shrinking in terms of employment?

McPheters: Of course, everyone has their eye on construction, and construction has lost jobs. It lost jobs last month; it has lost jobs over the past year. Those industries related to construction — like real estate, financial credit, mortgage credit, and in that area, real estate related employment, building supplies — these sorts of things, kind of all these interconnected construction jobs, that whole area is weak.

And, of course, manufacturing has been losing jobs for several years. So, that's an area of job loss. One element that analysts are really watching closely is a category called temporary employment. This is a buffer type of category. When the economy is expanding, this temporary employment expands as well, but when the economy is beginning to turn down and slow down, then the temporary employment category begins to weaken.

That took quite a drop in September, over 300 jobs lost in what are called "temporary employment services." On the bright side, there are several areas that are strong. Services in general — still strong. Health care is growing, and in the service category, professional and technical services. You can think of that as the upper end of services. That includes accountants, lawyers, consultants, and technical people. Those professional services are still a strong part of the job market.

Knowledge: Are there some regions of the country that are doing better than others, and why?

McPheters: The strongest labor markets in the country right now tend to be in the West. Utah is the number one growth state, and they have been a strong state for job growth. One of the reasons there is that somehow, they seem to have completely missed the construction slowdown. Utah is also the number one state for construction job growth. Other Western states that are doing quite well are Wyoming and Montana.

Wyoming, in particular, is a state whose economy depends on coal, gas, oil: an energy-based, resource-based economy. And with the high prices that we're seeing for commodities in those types of energy services and products, particularly coal, Wyoming is doing quite well. Going to the other extreme, the weakest part of the country is still the Midwest.

Michigan has been losing jobs for just about five years, consecutive now. With the most recent numbers we have, Ohio has lost jobs compared to a year ago at this time. Parts of Indiana are losing jobs. Those are areas that have a strong manufacturing base, and of course that's been eroded. That's the number one explanation for their economic woes right now.

Knowledge: So, looking at your crystal ball, how does it look in 2008 in terms of employment? Are some industries going to be still stronger than others? Are we going to see any rebounds, you think?

McPheters: Well, one element that I think somehow gets lost in the shuffle is that all the news about construction is, in fact, not bad at all. In fact, construction employment remains surprisingly strong.

With all the headlines saying residential activity and housing permits are down and sales are down and inventories are at very high levels, what we tend to forget is the nonresidential side of construction: public construction such as roads, schools, that sort of thing, and the nonresidential part of construction that would be involved with commercial structures like shopping malls and office space.

Both the nonresidential components of construction are at all-time record levels and are growing, right now, at about 15 percent a year. So they are, really, actually still creating construction jobs. So, as we look at the economy right now, I think the consensus would put GDP growth for next year at two-and-a-half percent growth. Your long term "optimal" — I would put that in quotes — growth for GDP is usually thought of as somewhere around three-and-a-half percent growth.

Most analysts would view GDP as about one percent off of its three-and-a-half percent growth rate because of weakness in residential housing. So, if the residential construction were to improve — and I think most analysts believe that sometime in 2008, we're going to see that improvement — we already have pretty good strength in the nonresidential. You have all-time record levels, really, of spending in that category.

What we are really waiting for, I think, is for residential construction to come back. We'll be going through a relatively slow period of economic growth. What we will probably see is unemployment, which moved up to 4.7 percent in the latest September report, drift up towards 5 percent. But I think the consensus, what most analysts would be targeting for 2008, is going to be continued slow job growth.

We would expect to see something in the range of at least 100,000 new jobs every month, down from what we saw in the previous couple years. What we will see, then, is a gradual improvement as the housing market begins to recover. That will then generate employment in that side, and then the economy would perhaps return to a higher growth pace.

Economics Faculty