Slight Job Gains Won't Shrink the High Unemployment Rate

Employment reports released this week show mixed results, but lead to the same conclusion: The high unemployment rate isn't improving any time soon.

U.S. private-sector jobs last month grew by only 42,000, according to a report issued yesterday (Wednesday) by payrolls processor Automatic Data Processing, Inc. (Nasdaq: ADP). ADP revised the number of jobs added in June to 19,000 from 13,000, which fell far short of economists' predictions of 39,000.

The ADP report "shows continued weakness in the jobs market, which is in part caused by the uncertainty in the economy and general business climate," said Gary Butler, ADP's chief executive, in a statement. "American businesses are on the cusp of recovery, but more effective incentives are needed to encourage business investment resulting in the creation of more jobs."

Job increases over the past six months have averaged 37,000, "with no evidence of acceleration," Joel Prakken, chairman of Macroeconomic Advisers, which produces the report from anonymous payroll data supplied by ADP, told MarketWatch.

"I do not expect to see [payrolls] growing at 200,000 or 300,000 per month, the kind of numbers that you'd like to see at this point in a recovery, and which are really necessary, I think, to help propel the recovery into a stronger, second phase," said Prakken.

July's job jump exceeded economists' expectations of 25,000 additional jobs and made the sixth consecutive month of job growth.

Separately, the Institute for Supply Management's non-manufacturing employment gauge increased to 50.9 from 49.7 in June, showing a rise in service industry jobs.

"Until we see this as a sustainable index above 50 for at least a full quarter, we won't know exactly where we're heading," Anthony Nieves, chairman of the ISM services survey, said in a conference call with reporters.

As some employers added jobs, many planned to take them away.

The "good" news was offset by a report from outplacement firm Challenger, Gray & Christmas, Inc. that employers announced plans last month to cut about 42,000 jobs, up 6% from June's 39,000 in job cuts. Challenger measures layoffs in government and non-profit sectors as well as the private sector.

Although cuts in July were down 57% from a year earlier, they have risen 9% over the past three months. Chief Executive Officer John Challenger said downsizing could continue in coming months as employers cut payrolls to meet earnings goals.

Layoffs in the government and non-profit sector reached 7,000 in July, up 36% from June's 5,300 total.

"This sector has the biggest potential for additional job-cut spikes between now and the end of the year," said Challenger. "Unless the states and municipalities can figure out a way to replace the money being lost from lower income, payroll and property tax revenue, then more job cuts will probably be necessary."

The reports precede the Bureau of Labor and Statistics employment report due out Friday. Analysts are expecting a drop of 65,000 in non-farm payrolls as the federal census work concludes, and a private-sector payroll increase of 90,000. The unemployment rate is expected to rise to 9.6% from 9.5% in June.

A weak employment outlook Friday could trigger speculation on what the Federal Reserve might do to lower borrowing costs. Experts have already discussed the possibility the Federal Open Market Committee (FOMC) will discuss buying Treasury debt when it meets next week.

Cutting Pay to Keep Jobs

In addition to cutting jobs, employers – especially local and state governments – have started more aggressive salary slashing.

Many local governments are asking unions to accept a salary reduction after trying furloughs but still needing to cut costs.

"We've seen pay freezes before in the public sector, but pay cuts are something very new to that sector," Gary N. Chaison, an industrial relations professor at Clark University, told The New York Times.

According to a 2010 National League of Cities survey, 51% of cities that responded had either cut or frozen city employee salaries and 22% had revised union contracts to reduce pay and benefits.

New York has considered a 4% wage cut for state employees and Vermont sliced state troopers' pay by 3%.

While most cuts happen to union employees, experts say many non-unionized businesses, like law firms, are also slashing salaries.

"Workers, of course, do not like to have their pay cut, but I think that workers' major concern now is, 'Do I have a job?'" David Lewin, a professor of management at the University of California, Los Angeles, told The Times.

And those that do have work are holding on to it, facing a bleak job outlook for the rest of 2010.

"We are going to see sub-par growth for quite some time," Lindsey Piegza, a market analyst with FTN Financial, told Reuters. "What this means to the average person on Main Street is that there is not a lot of jobs out there. There is still a lot of pressure on consumers and investors."

News and Related Links:

• Money Morning:
  Unemployment Report Shows Sluggish Recovery Will Take Years to Replace Jobs Lost in Great Recession
• Bloomberg:
  U.S. Economy: Service Companies Expanded at Faster Pace in July
• MarketWatch:
  U.S. employment up 42,000 in July: ADP
• CNN Money:
  Job reports: Private growth, government cuts
• The New York Times:
  More Workers Face Pay Cuts, Not Furloughs
• Reuters:
  Private sector job growth remains tepid