After the recent string of unexpectedly weak economic statistics (e.g., the ADP report, the Case/Shiller housing price slump, and the ISM manufacturing index) I was pleasantly surprised this morning to see that the jobs numbers weren't bad at all. Yes, private sector jobs only increased 83K in May, after a downwardly-revised 251K in April, according to the establishment survey. But the household survey, which is often overlooked, reported a gain of 373K private sector jobs in May, after a loss of 11K in April. These two surveys can often move in different directions, but over time they move together, as the top chart above shows.
Both surveys are now showing that in the past six months, jobs growth has actually picked up, as we see the chart above. Abstracting from the May weakness in the establishment survey, which is most likely due to the same tsunami- and weather-related disruptions that impacted the ISM and ADP numbers, private sector jobs are growing at almost a 2% annualized rate, the fastest we have seen since early 2007. That's not a great number, but it is enough to bring the unemployment rate down over time—albeit very slowly, and in fits and starts—as the next chart shows.
The other encouraging part of today's jobs report—from a taxpayer's perspective—was the news that public sector jobs are declining at an accelerating pace. As shown in the chart above, according to the establishment report the public sector has pared over half a million jobs (ignoring the census-related bulge last year), while the private sector has created about 2 million. We haven't seen public sector job losses of this magnitude since the recession of 1981-2. I've been arguing for a long time that cutting back on the size of government and on government spending is necessary, and on balance a net positive for the economy. Government spending has grown so much in recent years that it is suffocating the private sector, so cutting spending should be stimulative. We are now seeing evidence that a significant shrinkage in the bloated public sector workforce doesn't necessarily lead to a painful result for the economy as a whole. In fact, cutting back government spending can free up resources that can be put to better use by the private sector, making the economy stronger over time. This is a trend that is now firmly in place, and that's very good news.
On a related note, the bulge in weekly unemployment claims data over the past month or so continues to look like faulty seasonal adjustment factors have been the real culprit, rather than any meaningful deterioration in the economy. Auto sector layoffs that typically occur in July were moved forward, and that was not anticipated in the seasonal factors. That means that as we approach July and the expected layoffs fail to occur, we should see a "surprising" decline in the weekly claims data. By then it will be clear to the market that all the recent gnashing of teeth and wringing of hands was misplaced. The economy may have hit a mild soft patch, but it is not sinking and is likely to continue to grow. Optimists will once again be rewarded for their patience.