Submitted by Edward Harrison of Credit Writedowns.
Yves’ posting will be at a low ebb over the next week (post-book trauma!). So, I will be covering some of the bases in the interim. Expect at least a post per weekday through next week.
Below is one I wrote on the employment numbers which came in at 9.8% and a 263,000 job loss. I mention my expectation that job losses will end within the next 6 months. However, that doesn;t mean the unemployment rate will remain near 10%. The non-farm payrolls and the unemployment numbers come from two different reports. Moreover, expect a lot of discouraged workers to re-enter the labor force, further ballooning the U-3 (baseline) number. The broader jobless number is already 17% – a depressionary-level reading.
In July, I blogged on an interesting take on how employment affects equity returns during cyclical recoveries by Van Hoisington and Lacy Hunt. Their thesis was that a recovery in which employment lags the overall upturn significantly is bearish for stocks. Since then, employment has indeed lagged other economic indicators. Witness the most recent employment situation summary released earlier today.
Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate (9.8 percent) continued to trend up, the U.S. Bureau of Labor Statistics reported today. The largest job losses were in construction, manufacturing, retail trade, and government.
Household Survey Data
Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent…
The civilian labor force participation rate declined by 0.3 percentage point in September to 65.2 percent. The employment-population ratio, at 58.8 percent, also declined over the month and has decreased by 3.9 percentage points since the recession began in December 2007.
Establishment Survey Data
Total nonfarm payroll employment declined by 263,000 in September. From May through September, job losses averaged 307,000 per month, compared with losses averaging 645,000 per month from November 2008 to April. Since the start of the recession in December 2007, payroll employment has fallen by 7.2 million.
In September, construction employment declined by 64,000. Monthly job losses averaged 66,000 from May through September, compared with an average of 117,000 per month from November to April. September job cuts were concentrated in the industry’s nonresidential components (-39,000) and in heavy construction (-12,000). Since December 2007, employment in construction has fallen by 1.5 million.
Employment in manufacturing fell by 51,000 in September. Over the past 3 months, job losses have averaged 53,000 per month, compared with an average monthly loss of 161,000 from October to June. Employment in manufacturing has contracted by 2.1 million since the onset of the recession.
In the service-providing sector, the number of jobs in retail trade fell by 39,000 in September. From April through September, retail employment has fallen by an average of 29,000 per month, compared with an average monthly loss of 68,000 for the prior 6-month period.
Government employment was down by 53,000 in September, with the largest decline occurring in the non-education component of local government (-24,000)…
In September, the average workweek for production and nonsupervisory workers on private nonfarm payrolls edged down by 0.1 hour to 33.0 hours. Both the manufacturing workweek and factory overtime decreased by 0.1 hour over the month, to 39.8 and 2.8 hours, respectively. (See table B-2.)
In September, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls edged up by 1 cent, or 0.1 percent, to $18.67. Over the past 12 months, average hourly earnings have risen by 2.5 percent, while average weekly earnings have risen by only 0.7 percent due to declines in the average workweek. (See table B-3.)
The change in total nonfarm payroll employment for July was revised from -276,000 to -304,000, and the change for August was revised from -216,000 to -201,000.
A few points here:
- Losing over 250,000 jobs per month nearly two years into recession is an indication of a still weak employment market. This is 400,000 jobs per month below where we want to be.
- Why is the labor force participation rate still falling? This is a sign of a deteriorating, not improving labor market.
- Manufacturing is still shedding workers even though industrial production is rising. That demonstrates a weakness whose source is record low capacity utilization.
- Local and state governments are cutting workforce and countering the stimulus provided by the Federal Government as I indicated in January they would.
- The workweek is a record low and this is crimping earnings power.
Conclusion: the labor market is till weak, weaker than it should be at this point in a cyclical recovery. Unless this changes in the fall and winter, a double dip recession is going to be more likely. While the preceding points stress the negative, I should point out that my baseline view is for job losses to continue to diminish, albeit at a slow pace. I would anticipate job gains to appear by the end of the year or early in 2010.
That gets me back to Hunt and Hoisington and partial recovery. Even if we see job gains by Q1 2010, this will be a full 6 months after the manufacturing sector turned up. This must limit consumption because spending can only increase through higher employment and income or increased debt and leverage. As most of the cost-cutting and productivity gains inherent in those cuts is now behind us, the heavy lifting begins. Earnings growth is likely to be weak in this environment.
How a fully priced equity and corporate bond market continues to rally in the face of these factors is beyond me. I see government bonds as a better bet than either corporates or equities for the medium-term.
Update: I failed to mention the rather large (over 800,000 jobs) benchmark revision of prior unemployment data. It’s this sort of thing which makes people not trust the numbers. But, revisions are always necessary if you are going to do month-to-month measurements in an economy as large as the United States.
Here’s what the BLS said:
Preliminary Estimates of Benchmark Revisions to the Establishment Survey
In accordance with usual practice, the U.S. Bureau of Labor Statistics is announcing its preliminary estimates of the upcoming annual benchmark revision to the establishment survey employment series. The final benchmark revision will be issued on February 5, 2010, with the publication of the January 2010 Employment Situation news release.
Each year, the Current Employment Statistics (CES) survey employment estimates are benchmarked to comprehensive counts of employment for the month of March. These counts are derived from state unemployment insurance tax records that nearly all employers are required to file. For national CES employment series, the annual benchmark revisions over the last 10 years have averaged plus or minus two-tenths of one percent of total nonfarm employment. The preliminary estimate of the benchmark revision indicates a downward adjustment to March 2009 total nonfarm employment of 824,000 (0.6 percent).
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I really enjoy reading your posts as someone that agrees with your long term structural views but hadn’t thought about some of the technical issues that would show temporary recovery.
That said, I feel that you are grossly optimistic in this post. I think jobs over the next 4 months are going to be a disaster, as Christmas sales plunge. If the expectations that CalculatedRisk posted a couple weeks ago are anywhere close to correct, that is going to lead to huge (seasonal) job losses followed by massive bankruptcies left and right of a myriad of retailers that have been on life support for the last few years.
Even though I agree that manufacturing unemployment is close to bottoming, we have yet to see the massive plunge in the service sector that must occur due to the amount of deleveraging of personal balance sheets.
Perhaps Christmas won’t be that bad, but it’s unlikely looking at trade flows and increasing reduction in consumer credit.
So Mikkel, I’m with you and Brian below in comments at 5:28, I do _not_ think that ‘bottoming’ is an appropriate description of manufacturing employment as of Oct 09 in the US. Manufacturing is on a shelf, literally, due to the inventory rebuild bounce. The formation of a trend bottom is a function of a real change in the vector of demand change. That vector continues to be downwards in most anything one can consider, vide Brian’s remark about the perilously thin forward order book at his shop. The slope of that trend hasn’t been as severely down but it has continued down, and continues down: no bottom.
Now, it we were seeing anything which suggested a significant, sustained rise in demand for manufacturing, manufacturing wouldn’t be on a shelf but inching up. Evidence?: none. Hence, manufacturing is likely to roll over and fall off that shelf. Barring truly humongous Guvmint stimulus which small version thereof plus rebound bump in China accounted for most of that trend deflection in demand and hence in manufacturin over the last six months. And we aren’t going to get such a stimulus in the US, so fuggedahbboudit. I don’ have sense as to whether we will see a precipitous downleg in output from an abysmal Christimas debt-engendering season (credit makes the ornaments spin round), or whether we will have a slouching-to-perdition downslope; maybe more the latter, hard to say. But I doubt that we’ll see anything that looks like a real bottom until second half 2010, at the earliest. Sez I.
One reason that I do not see this as a bottom, which I neglected to mention, is that notions of a present ‘recovery’ or ‘stabilization’ which are current are based upon perceptions of ‘normal downturns’ over the last generation. Which have been _abnormal_ on the whole relative to historical comparables and relevant financial system crashes in other contemporary contexts. We simply aren’t in a ‘normal downturn.’ Ones perceptions of possibilities have to be scaled to the index of the problem, in this case radically scaled _up_ in terms of impacts and timeframes. This is what is missing, to me, in too much of present commentary. And Ed H. I’m not saying this to harsh on you, personally. You are generally cautious in your calls, and well-evidence what you advance. But again, I don’t think that on the whole the economic commentariat is engaged with the scale of the problem we face: the debt burden, the employment loss, the evanescene of financial system credit provision, the still to be realized losses, the still to come losses, yetcetera, yetcetera. Timmy at the Cashbox has been blowing smoke and nitrous following on Hank the Bandit’s precedents, and so it’s easy to be lulled NOT to think of all these, these . . . worrisome things. That doesn’t make them go away, and we can expect to meet them on the road.
This isn’t a ‘normal crash’ and isn’t a ‘recession’ so reasoning based upon this process _acting_ like either such processes is highly likely to bang it’s nose into the realities in our path.
The best that could be said as of Oct 09 is that powers that be have successfully diverted a panic. [*heh* That was too too sweet a quip not to paste it up.]
I must say I agree things are getting less bad but I’m racking my brain as to how we are actually going to gain jobs anytime in 2010. I simply cannot foresee a strong Christmas season and a weak number will result in more job cuts if anything as forecasts are racheted down. From an personal point of view as a member of corporate America, the desire is still strong to “cut expenses” but I sense we are in a lull as management decides how the economy is shaping up. If we fall short and I believe we will, then the axe will fall anew.
The latest From Professor Roubini
Thoughts on Where We Are
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Nouriel Roubini | Oct 2, 2009
Editor’s Note: The following are excerpts of a briefing this week Nouriel Roubini delivered to RGE Analysts in New York.
Roubini on ‘U’ and ‘V’ Shaped Recoveries
I was thinking about anemic growth, which I’ve been saying means 1-1.5% growth next year, which denotes a U-shaped recovery. But what if we see 2% growth next year for a while? 2% is better than 1.5%, but implies that the output gap is still rising, assuming that potential GDP and unemployment are also still rising. This happened in the 2002 recovery for a few quarters. So if growth is closer to 2% rather than 1% for a number of quarters—and potential growth is 2.75% —to me that’s still a U-shaped recovery. Even if you go to potential growth at 2.75%, that’s not enough to mop up all that excess slack in the output gap and labor markets for a while.
You need to grow faster than potential for a while in order to reduce the output gap. If you go back to potential growth, the output gap might not be widening again, but the difference between that level and potential stays as a permanent hole. If instead you grow faster than potential then you reduce that gap and you also reduce the slack in labor markets. But if you grow below potential the labor markets will be weaker—and weaker means rising unemployment rates.
So I think we have to be open to the idea that things in 2010 can be better, but it might still be a U-shaped recovery. If we go into 2010 with 3%+ momentum and in 2010 the economy grows 3% to 4%, meaning above trend, then clearly we are in a V-shaped recovery. But if we go to 1.5% to 2%—even if its 2%—that to me looks like a U because we would have to be at least at potential, and probably more, in order to reduce all that labor market slack.
Roubini on the Federal Reserve Raising the Fed Funds Rate
My view has always been that I don’t think the Fed will even think about raising rates until the end of next year, and more likely 2011, even if we have a V-shaped recovery. Markets were pricing in a rate hike as soon as January or February, a year earlier than I think is likely. This may depend on how robust the recovery is and on whether it is jobless or not.
By some standards, our last recovery from recession was V-shaped, if you think of it in terms of GDP growth. But the Fed kept cutting rates until the middle of 2003 and then kept them at a low level of 1% until mid-2004 before beginning a process of tightening.
You’d have to really have a meaningful V-shaped surprise—that is consistent and resilient—for the Fed to consider raising rates as soon as Q1 2010. Conceptually, in order to raise the fed funds rate you would first need to mop up all the excess liquidity (base money), though some people argue that is unnecessary as now the Fed could use interest rates on reserves as a monetary policy tool. Do we need monetary policy to target asset prices? We now have banks that can borrow at zero interest rates and some point out that this might be the beginning of a new bubble. You can use the fed funds rate to target growth and inflation and assign regulatory policy to avoid another asset bubble. Even if you are doing regulatory policy, you are doing micromanagement of credit flows, but ultimately the only tool that has a broad base and signals to everybody a higher cost of capital is an increase in the fed funds rate.
Some ask whether we could find ourselves in a situation in which we have a problem of growth and inflation, if we assume a V-shaped recovery and rising inflation expectation given the unprecedented policy measures. But there are essentially two ways you can get inflation. One is if the economy overheats and we will be lucky if we have that problem (in that case the slack in the labor market would be eliminated and unemployment could go below its natural rate). The other is a situation in which you have output falling but inflation is going up. A stagflationary situation could arise from an oil shock for example. Stagflation needs a weak economy and a supply side shock, the chances of that happening are more related to geopolitical risks than economic fundamentals.
http://www.rgemonitor.com/blog/roubini/257773/thoughts_on_where_we_are
I think the economy – especially manufacturing – is much weaker than anyone thinks. 4 months ago, we saw an upturn in our production capacity to 85 – 90% (we manufacture industrial automation equipment). Now, we are scraping the barrel and sending people home early. The next 3 months don’t look good. Quotes and sales are dropping off and layoffs of the workers we called back 4 months ago seem likely.
Well we’ve been hiring! Yessiree, more delinquent accounts for this utility than you can shake a stick at. We sell nat gas and, despite the falling per unit cost, people aren’t paying.
Methane leaks can be mistaken for green shoots when the gas first permeates the soil. The grass will turn a lush green. However, as the leak persists, the fertilizer effect gives way and a dead zone appears above the leak. Larry Kudlow must have a lot of leaks in his lawn!
July-September were the best months Obama could expect in terms of jobs and he didn’t even break even on them. Nor with all the drags on the economy have we seen the last of job losses. I am mystified where this partial recovery is going to come from. What is a partial recovery anyway? A recovery that recovers except for the recovery part? Anyway consumers are still tapped out. Inventory restocking is likely to be weak. Who in their right minds is going to build inventories looking at an economy like this one? What spending we are seeing is mostly on the governmental side and a fair amount of that is for Obama’s wars, so not exactly a great investment. The stock market rally is mature and could go south at anytime. So again where is this recovery going to come from?
As for Roubini, he had a good period but now he just sounds like he is on drugs.
A partial recovery is one where speculators get a momentum play and alpha banks finish in the black. Wait, that’s the definition of a _full_ recovery, too, since don’t do anything serious about unemployment except *tut-tut* and fudge the numbers anyway. To me the way analysis on economic conditions has degenerated to complete progaganda is discumbobulating. We have reached a point under Greenspan’s tenure where it’s acceptable to talk abou a ‘recovery ex-jobs,’ exactly the state I referred to in the first sentence, here. In other words, a recovery is profitability for the only folks who really matter, the Diamond 3%. The rest of us? We can go to Hell and stay there, as long as there are no ‘violent’ protests.
Ed, thanks, I always enjoy your posts. The title of this one, however, confuses me. What, exactly, in the unemployment numbers points to a partial recovery (and what exactly does a “partial recovery” mean?)?
Scott, a partial recovery is an official recovery that does not see a coincident uptick in the five economic variables that the NBER track to assess recovery. they are: real GDP, real income, employment, industrial production, and wholesale-retail sales.
Usually these rise and fall in concert. But, in 2001 for example, they did not. Employment lagged. Hoisington and Hunt feel the late stock market bottom in 2002 was due to this lag.
«In other words, a recovery is profitability for the only folks who really matter, the Diamond 3%.»
But the 60-70% of voters who are home owners regard themselves as rentier landlords like the top 1% and the main thing that matters is rising asset prices and a huge income boost with capital gains. That is what defines nowadays economic policy and a recovery: capital gains (*nominal* ones).
Declining less fast is not necessarily the beginning of the formation of a bottom. We could go much much deeper before we actually hit bottom. If you play with the metrics you can probably assert, at some point, that we have reached bottom. Having said that there will be the unemployed voice that raises up and says, ‘the hell you say’. Now what is critical is that that will not be a solitary voice.
The trend of Employment, GDP, Personal Income and Personal Consumption are generally accepted as being key measures of the health of the economy. Last I saw, each of those items was declining, albeit at a slower rate, none seemed to be nearing points of inflection that could reliably be taken as indcators of stabilization with the potential for improvement.
Nice piece Ed and very well documented, nonetheless, I think unemployment is a very weak guide and that ‘partial recovery’ is something like an oxymoron. Which is not to dissaude you from your postings, they are, indeed, helpful.