Is the Job Market Ready for a Recovery?
William Hester, CFA
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Friday's job data offered confirming evidence neither to those expecting a strong recovery nor to those with more tempered expectations. Whatever opinion an investor came into the day with was probably not swayed by the data. While the rate of job losses continued to slow, the unemployment rate jumped to a 26-year high, and measures of labor underutilization crept higher.
The soundest argument of analysts and economists arguing for a strong economic rebound is that the direction of the rate of job losses is moving in the right direction. That trend has been clear. The three-month average change in nonfarm payrolls is now a decline of 318 thousand jobs per month, compared with a loss of 691 thousand jobs for the three-month period ending in March.
Direction is an important part of any data series, but another important part is the level. And the distinction between the direction of job loss numbers and the actual health of the job market has become more important recently, as economic and stock optimism has leapt during the last few months.
A consensus appears to be forming that the economy bottomed in June. Economists polled by Bloomberg expect that the economy will grow by 2 percent during each of the next two quarters. If June does mark the end of the recession of 2007 to 2009, then the economy is more than two months into a new expansion. If we take this view, we can ask an important question. What does the health of the job market typically look like when the economy is a couple of months into an expansion? We know that the unemployment rate generally lags economic growth, but a variety of employment-related measures are much better "coincident" indicators. A more complete picture takes into account not only direction but also the level of various job market indicators.
The bar charts below take data from either the BLS's household data or its establishment data from the two months after the end of each recession since 1950. I stuck with data that can be compared over time. This will give a sense of the health of the job market that was typically seen during the early part of each expansion following post-1950 recessions.
The first chart shows the unemployment rate. Only in 1982 was a larger percentage of the labor force unemployed shortly after the end of a recession. In fact, the current recession overshadows 1982 on virtually every measure (except of course for stock market valuation, which troughed at a far lower level in 1982 than during the recent selloff). In addition, the current unemployment rate might be understating the pressures on household incomes and spending power. The BLS's U-6 unemployment rate - which measures those unemployed and actively looking for work, discouraged workers, and those workers who are employed only part time for economic reasons - rose again in August to 16.8 percent, a record. Far more workers have become discouraged when looking for jobs, or who have settled with part-time work during this recession, than in the 2001 recession.
Historically job cuts have tended to subside quickly when the economy begins to expand. The recessions prior to 1991 typically experienced job growth soon after the end of each recession, or at least had smaller contractions in employment. The economic recoveries in 1991 and 2001 had below average job growth from the economy's trough, and the chart shows that weakness. But even in these cases job losses were about 40 percent lower than the most recent change in nonfarm payrolls. If the economy is currently in a recovery, the declines in employment in August will be the largest declines a couple of months into any post-war expansion.
The chart below shows the percentage of the labor force that has been unemployed 15 weeks or longer. Typically about 2 percent of the labor force is forced into a protracted period of unemployment near the end of recession and soon after. In 1982 a little more than 4 percent of workers were out of work for more than 15 weeks when the economy emerged from that contraction. In August more than 5 percent of the labor force was out of work for 15 weeks or longer.
The next graph shows the average duration of unemployment in weeks. This is a chart where comparing the direction of the series to its level shows a sharp contrast. The good news in August was that the average duration of unemployment fell from 25.1 to 24.9 weeks. But when you compare the current level of the duration of unemployment with previous periods early in expansion it shows just how challenging it has been for laid-off workers to find new jobs in this recession. The current average duration of almost 25 weeks sits far above the typical duration of about 14 weeks.
The next chart looks at those who are unemployed, and calculates what percent have been out of work for 27 weeks or more. Typically about 14 percent of those unemployed find themselves out of work for 27 weeks or more near the end of recession. In August, more than 33 percent of those unemployed have been out of work 27 weeks or more. It's difficult to imagine that these long durations of unemployment will not play a role in the psychology of households in spending and saving decisions in any economic recovery, or on the rate of mortgage delinquencies and foreclosures.
One of the more discouraging data points for workers in Friday's report was the drop in temporary hiring. While the rate of decline in this data series has slowed when compared to trends from earlier this year, employers are still cutting temporary positions on a net basis. It will be important to watch this data series when it turns positive and to monitor how strongly it does so, because temporary hiring is a reliable leading indicator of nonfarm payrolls.
At the beginning of this decade, temporary hiring turned down in April of 2000, eleven months before the 2001 recession began. After the economy weakened, it would end up putting in a double bottom. The first time temporary hiring bottomed was in December 2001, just one month after that year's recession ended. It rose modestly, as the overall jobless recovery began. Interestingly, it turned down again and bottomed in April of 2003, a month after that year's bottom in the stock market. Following the most recent economic expansion, temporary employment peaked in December 2006, a year before the start of the current recession. It's fallen for 20 consecutive months through August, failing to reflect the recent strength in the stock market.
Temporary hiring will almost surely bottom prior to overall employment in this cycle. With economic uncertainly high, and labor bargaining power low, temporary hires will be a conservative way for employers to ease back into expanding payrolls when final demand begins to increase. Further declines in temporary hiring in upcoming employment data would probably push back any recovery in nonfarm payrolls.
The direction and the level of a data series are distinct and important measures. The direction of the trend in labor data has been improving, reflecting a consecutive string of "less bad" news. Temporary hiring is an exception, and has continued to deteriorate. Beyond that, the level of the health of the job market is still a concern, because job market indicators remain at levels far worse than those typically seen early in an expansion.
The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse.
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