ECONOMICS: US PERSPECTIVES—NOV 13, 2009

Weak Labor Markets Do Not Pose Fatal

Threat to Nascent US Economic Recovery
Joseph G. Carson
US Economist and Director—Global Economic Research, (212) 969 6886

After deep recessions, gains in jobs, wages and salary income Display 1
Highest Unemployment Rate in 27 Years
are needed to stabilize and sustain the new economic cycle. We
Job Market Trends During the Recessions
believe that the current spike in US unemployment has been of 1981–82 and 2008–09

driven by a combination of cyclical and noncyclical factors that (% Unemployed)

12
1981–82
are not incongruous with a durable economic recovery. 10

The labor markets are still the weak link in
the US economic recovery. In October, the
civilian unemployment rate rose 0.4
percentage points to 10.2%, reaching
double digits for the first time since 1982
(Display 1). Ongoing weakness in labor
markets appears to raise a serious
challenge to our forecast for a sustainable
8 2008–09
cycle, to help assess whether today’s 6
employment trends are out of line with 4
previous economic recoveries.
2
0
Employment Indicators Diverge 1 3 5 7 9 11 13 15 17 19 21 23
October’s employment data were weak, Months of Recession
but there was an unusually wide diver-
Source: Haver Analytics, US Department of Labor and US Bureau
gence in the two series issued by the of Labor Statistics

recovery in GDP growth through 2010.
After deep recessions, improvements in
economic growth and corporate profits
must prompt gains in jobs, wages and
salary income in order for the new
economic cycle to stabilize and persist.
Nevertheless, we believe it is premature to
conclude that the weak jobs data pose a
fatal threat to the US economic recovery.
The current bout of unemployment is
driven by a combination of cyclical and
noncyclical factors. These complex
Bureau of Labor Statistics to gauge labor
market conditions. For example, according
to the household survey, which is based on Display 2
a rotating sample of 60,000 households, Jobless Claims Peaked at Similar Levels…
employment fell by 535,000 jobs in Jobless Claims During Recessions of
October, one the worst months for jobs in 1981–1982 and 2008–2009
2009. This followed an even sharper Thousands
decline of 785,000 jobs in September. 800
700
1981–82
600
In contrast, the payroll series, based on
500
information from 350,000 establishments, 400 2008–09
showed that 190,000 jobs were lost in 300
October, the second smallest decline of the 200
year. Job losses over the previous two 100

dynamics are crucial to understanding months were also revised downward by 0

1 3 5 7 9 11 13 15 17
whether a recovery in jobs is being held up 91,000. Months of Recession
by factors that are unrelated to the recent
recession. In addition, it is important to try These two employment measures are
and pinpoint where we are in the recovery generally reliable and rarely diverge so
substantially. Both have proven track
records and the payroll series has been the
more trustworthy over time. However, in
each of the previous two recoveries the
household series provided a better and
earlier signal for a rebound. So how can
we interpret the gap between the two
indicators and determine which series is
telling a more accurate story on the
current state of the labor markets?
We identified several items that could shed
light on cyclical and structural forces at
work behind the weak employment
statistics. In addition, we compared current
conditions with those in 1981–1982, the
last time the unemployment rate exceeded
10%, to provide insight into the spike in
unemployment.
First, an increase in joblessness usually
means that companies are cutting back on
staff levels. The best way to track layoffs is
by looking at trends in weekly jobless
claims. Although the level of claims in
2008–09 started at a lower level when
compared with the 1981–92 recession,
they peaked at a similar point (Display 2,
previous page). On the surface, this
suggests that rising unemployment today
is being driven by forces similar to those in
the 1981-82 downturn.
However, when compared with the size of
the workforce (Display 3), jobless claims
in 2008-09 appear much lower than in
1981–82. This suggests that other cyclical
or structural factors may be behind the
relatively large increase in the unemploy-
ment rate.
Why Aren’t Companies Hiring?
What else could be fueling additional
unemployment and incremental declines in
jobs? Perhaps it is simply that companies
do not yet have the confidence in the
economic recovery to renew hiring.
Indeed, from a cyclical perspective, the
historical record suggests that it is too early
to expect employment to recover. As we
noted in a previous commentary, the
timing of an employment rebound is
highly correlated with inventory restocking. Display 3
In the third quarter, inventory liquidation …but Relative to Size of Workforce,
reached an annualized rate of $130 billion, Jobless Claims Are Lower Now
and we expect more liquidation in the Jobless Claims as % of Workforce
current quarter (Display 4). This means
(% of Workforce)
that a hiring rebound is unlikely to begin in 0.008 1981–82
earnest until the first quarter of 2010. The 0.007
sluggish job markets therefore are not 0.006
0.005
incongruous with the beginning of a
0.004
return to sustained economic growth. 2008–09
0.003
0.002
Productivity Gains May Delay Hiring 0.001
Weakness in the labor market may also be 0
1 3 5 7 9 11 13 15 17
related to some structural changes in the Months of Recession
economy, such as improved productivity
trends. During the recent downturn, US
companies posted unprecedented
productivity gains (Display 5), which may Display 4
allow them to delay rehiring. After Jobs Revival Unlikely Before Inventory
previous downturns, companies did not Liquidation Ends
have the benefit of such strong productivi- Payroll and Inventory Patterns
ty growth, which may have compelled
(YoY % Chg.) (YoY % Chg.)
them to resume hiring at an earlier point in 10 Inventory 6
(left scale)
the recovery. 8
6 4
4 2
It’s not entirely clear yet whether the 2
improved secular trend in productivity has 0 0
(2)
permanently altered the rehiring cycle, but (4) (2)
our analysis shows that the pace of hiring (6) Payroll
(4)
(8) (right scale)
is much lower than in the past (Display 6,
(10) (6)
next page). We created a hiring series 69 72 75 78 81 84 87 90 93 96 99 02 05 08
based on both the household and payroll
Source: Haver Analytics, US Bureau of Labor Statistics, US Bureau
series by subtracting monthly gross layoffs of Economic Analysis and AllianceBernstein
(jobless claims) from the net change in
employment. In both cases, relatively low
hiring levels are not yet capable of
Display 5
outweighing gross layoffs.
Productivity Gains Have Continued
Payroll Series Looks More Reliable Productivity Trends During Recessions of
1981–82 and 2008–09
Based on this research and other labor
market statistics, we think that the payroll (YoY % Chg.)
4
employment series is telling a more
3
accurate story on underlying employment 2008–09
2
conditions. First, the implied hiring rate
1
from the household employment data is
0
highly volatile and the most recent (1)
observations show a sharp break from (2) 1981–82
trends in the payroll series. In past periods, (3)
when such a large divergence occurred, the 1 2 3 4 5 6 7
Quarters of Recession
household series proved to be less reliable.
NOV 13, 2009 ECONOMIC PERSPECTIVES
Second, federal withheld income tax
receipts have shown incremental month-
to-month and year-on-year improvement
over the past month or so, which is
consistent with smaller job losses.
worst. However, we believe that this is an
oversimplification of complex job market Display 6
trends. Hiring Rate Is Still Relatively Low
Implied Hiring Rate from Household and Payroll
An analysis of the weak employment Employment Series

statistics reveals several cyclical and (%)

Third, weekly jobless claims continue to structural factors at work. Although the 0.04
Payroll
decline, with the most recent reading of employment environment remains 0.03
Household
502,000 for the week of November 7 challenging and is a key risk to our 0.03
representing the lowest figure since early forecast for a revival of sustained economic 0.02
January. Declines in jobless claims point to growth, we believe the underlying trends 0.02
fewer layoffs and smaller job losses. in the US job market do not represent a 0.01
major threat to the recovery at this time. n 0.01
It’s easy to look at the severe headline 0.00
80 83 86 89 92 95 98 01 04 07
unemployment figures and to fear the

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NOV 13, 2009 ECONOMIC PERSPECTIVES