Not An Island
The employment situation report for May, along with other recent data, suggests that the modest improvement in the U.S. economy and the U.S. labor market that we celebrated earlier this year might be capitulating to growing world troubles. Net payroll job creation was a meager 69,000, about half of what is needed to even keep up with labor force growth. And the weak job creation performance in March and April got even weaker with revisions. All told, net monthly employment growth has averaged 96,000 since March, considerably less than half of the 252,000 average for the prior three months. In a troubling sign for the broad economy, average weekly hours in both the private economy and the manufacturing sector slipped to the lowest level since November 2011. More alarmingly, given the huge long-term unemployment problem in the U.S., the average duration of unemployment, which had been falling since November, rose from 39.1 weeks in April to 39.7 weeks in May.
The U.S. manufacturing sector continues to be a positive economic force in these difficult times—but not one that is completely immune from a world of troubles. The May report from the Institute for Supply Management showed that the widely followed Purchasing Managers Index slipped but remained above 50 percent, signaling that the factory sector is continuing its steady but thus far incomplete recovery from the 20 percent output contraction that it suffered in the 2007-2009 recession. The new orders component of the Index even bucked the trend and rose to a very strong 60.1 percent. The other data, however, did show that global troubles may be starting to take their toll on U.S. factories. The backlog of orders, an indicator of the pressure on the production schedule, not only remained below 50 but fell from April levels, creating concerns about near-term manufacturing output growth.
The fact that U.S. manufacturing has now had positive job growth in all but two months since January 2010 is a good sign for the capacity of the factory sector to provide some help for a stumbling U.S. economy. But even supports have their limits and U.S. factories are unlikely to escape the consequences of an increasingly weak and risky world economy. Economic policymakers cannot count on the U.S. as a stalwart in a troubled world. Increasingly, we must think and act on economic dangers beyond our borders.