US Labor market begins to succumb, January NFP declines by 17K

It wasn’t a happy new year for the US wage earner as the labor market, deemed to be the last leg of the crippling US economy, shed 18K jobs in January belying consensus estimates (+70k) that were upbeat after the robust January ADP employment data release. This is its first decline since August 2003 (-42K) when the labor market hadn’t fully recovered from the 2001 recession. While the January NFP does ring alarm bells it is essential to look beyond the initial estimates to gauge the real picture since they are subject to constant modification. Revisions to previous NFP data were mixed. While November job growth was revised down by almost half, to 60k. December payrolls were revised up by 64k to show an 82k gain. Nevertheless, the year 2007 has been one of the worst for the US labor market in recent years with average monthly addition of just 95K jobs as compared to solid 175K in 2006.
Gains in services like health care, retail and leisure did little to offset declines in sectors such as manufacturing, construction, financial services and government. While government shed 18k positions private employers provided little support by adding just1k jobs. The construction industry cut 27k jobs in January with most of the decline concentrated in housing. The meltdown in housing has taken a toll on construction with the industry losing a total of 284k jobs since its peak in September 2006. Thanks to plummeting house prices, the value of residential construction put in place in 2007 plunged 18.3% YoY. The axe also fell on factory workers with 28K jobs eliminated last month. Commercial banking lost 4k jobs last month. Support from the services sector seems to be dwindling as it added only 34k jobs last month as compared to 143k in December.

Although the dip in unemployment to 4.9% from 5% comes as a welcome relief, it still remains at elevated levels and may touch the dreaded 5% mark again if the jobs growth fails to recover soon. With employers tightening their belts amidst the economic slowdown wage earners are also likely to feel the heat of a slowdown in wage growth (+0.2% vs. 0.4% previously) as inflation continues to edge up. With the subprime mess having festered, a weak labor market is bound to put even greater stress on the US consumer.
The January data leaves little doubt that the US economy is beginning to falter under a trifecta of intense headwinds; a severe housing contraction, credit market turmoil and surging commodity prices.