By Spencer

With the unemployment rate jumping to 8.1% and downward revisions of the previous months
employment numbers it is hard to find anything encouraging in the February employment report.

But there is one tentative good sign. I watch both the payroll and households surveys because the household survey tends to lead the payroll report at turning points. I believe this is because the household survey does a better job of reflecting what is happening in small business and small firms tend to react quicker to changes in the economic environment. This month for the first time this cycle the two measures diverged with the year over year drop in the payroll measure dropping more than the household survey. It is not a sign of a bottom, but it is a sign that the economy may be approaching a bottom.

On the other hand the index of aggregate hours worked fell 0.7% to 101.9 versus the fourth quarter average of 104.1. So on a quarter to quarter basis we are now looking at a drop in hours worked in the first quarter of around -8.8% as compared to a drop of -7.4% in the fourth quarter. This implies that first quarter real GDP growth could be weaker than fourth quarter growth.

Compared to other cycles the drop in hours worked is approaching the lows seen in the 1974 and 1981 severe recessions.
In addition we are starting to see the drop in wage gains that usually develops in and after a recession. However, my wage equations implies that this wage moderation is just starting.

The combination of slowing wage growth and falling hours worked is generating a sharp slowing of average weekly wages. In the first quarter falling oil prices caused even this weak gain in
nominal wages to generate solid gain in real earnings. But if oil prices rebound, or other upward pressures on prices cause inflation to rise significantly it is hard to see how the January uptick in real retail sales and real consumer spending can be sustained.