Nonfarm payrolls-A Deep Hole,Steep Slope

Make no mistake about it the September report on the unemployment situation indicates that the labour market is in horrible shape. Sure, it can be pointed out that the decline in payrolls the last 3 months have not been as bad as the results from the end of last year and earlier this year but the direction is unchanged and the hole that has been dug is deep and getting deeper. Although there is some comfort found in the idea that the unemployment rate is a lagging indicator for the economy as a whole there is good reason to believe that the coincident effect of the troubled labor market will be a weight on economic growth for years to come.


The labour market has fallen a looooong way since this recession began and I think that is the important point, especially when the details of the of the jobs report suggest that the slope remains so slippery. Non-farm payrolls fell another 263,000 in September; this measure of employment has now fallen for 21 months in a row. The most recent 3 month total is a decline of 768,000 jobs. While this is considerably smaller than any other 3 month run since last October, it is the biggest job drop for any Q3 since 1945. But on a relative basis smaller numbers of people losing their job is better than larger numbers getting 'laid off' and on this basis there is reason to believe that the recent months will soon look even better in comparison to what came before, but for all the wrong reasons. The Labor Department’s preliminary look at the Benchmark Revision for the period from April 2008 through March 2009 indicates that job losses were underestimated by 824,000, in other words they expect to make a downward revision of 0.06% early next year on the payrolls for that time frame, or, according to BLS Commissioner Keith Hall, an amount that is triple “the historical average for the benchmark revision over the prior ten years,” which “has been plus or minus two tenths of one percent.”


“How did the government get it so wrong?” asked Floyd Norris in the New York Times this weekend. “The official job numbers are based on a monthly survey of employers, augmented by the ‘birth-death model’, which factors in jobs assumed to have been created by employers who are too new to have been included in the survey, and subtracts jobs from employers assumed to have failed and therefore not responded to the latest survey.,” wrote Norris. This mathematical model has consistently added payroll jobs to the Not Seasonally Adjusted total throughout the recession, assuming more jobs were added through newly opened businesses than were being subtracted by businesses that were newly shuttered. This even as another BLS report, the Business Employment Dynamics, showed that the net change in the number of establishments fell for an unprecedented 4 quarters in a row during 2008, a net of 126,000 businesses closed last year. The Times article noted, “Victoria Battista, an economist at the Bureau of Labor Statistics, said the bureau was looking at whether that model needed to be changed as well as at other possible issues, such as changing response rates to the questionnaire sent out to employers each month.” If changes are made to the birth-death model, for instance making it responsive to the ebb and flow of the economy, something the calculation has completely rejected up to now, it could cut into the most consistently additive piece of the payroll report.


In any case, if the benchmark revision estimate is accurate it likely means that the total non-farm payrolls will register a net decline for the decade ending December 2009. The worst previous result for any decade since the 1940s was a payroll gain of almost 17%!!! Another aspect of employment already finds itself in a comparable hole. The Household Survey of the jobs report measures the number of Full Time Employees. This category fell 814,000 in September, it is now down more than 10m since the recession began and at 111.45m is at a level last seen in November 1999. The unemployment rate for Full Time Employees rose to 10.7% last month, up from 4.8% at the onset of the recession. In the last 12 months the number of full time employees has fallen 6.9%; this statistic has been tracked since 1969, the worst previous 12 month decline was 3.2% in 1975. The loss of 'full timers' has been partially offset by several million workers who are part timers because that is the only work they could find, but because of this tradeoff, the Aggregate Hours Index is down by a record 8.6% from the peak and the average work week is at a record low of 33.0 hours; both of these trends pressure overall wages down. Additionally, the alternate measure of the unemployment rate, which includes the workers who are part time for economic reasons and the discouraged jobless who are not longer looking for work, has reached 17%, a record spread above the official jobless rate of 9.8%.


While it is true that the rate of firing has eased there continues to be no indication that the rate of hiring is ready to rise. The average duration of unemployment is now a record at 26.2 weeks, a fraction longer than is the traditional duration for state unemployment benefits; this never got higher than twenty one percent in the early 1980s when the jobless rate peaked at 10.8%. That helps explain why more than 52% of claimants, on average over the last year, exhausted their benefits without ever finding work; never before had this statistic even been as high as 44%.


I could goooooooooooo on, but you get the idea; the labour market is in a hole that is deep and the downward slope has been steep. The problem with the road out is that household debt now amounts to about 125% of after tax income. Back in the early 80s, the last time the jobless rate was as high or higher than the current level, the ratio of debt to income was only about 50% of what it is now. The saving rate for US households back then averaged more than 10%, today it is 'just' 3.0%. There is good reason to believe that de-leveraging by the US consumer is ongoing; a process that could continue for several years, not an event that will occur and be done with in short order. The poor state of the labour market only reinforces the general need and desire to delever. I find it difficult to imagine how the labour market achieves an escape velocity sufficient to break this orbit any time soon.

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