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Evidence for many coming months, even years, of depressing jobs news [ClearOnMoney]
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Evidence for many coming months, even years, of depressing jobs news

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Commentary

Evidence for many coming months, even years, of depressing jobs news

3 Sep 2010 by Jim Fickett.

Looking at current trends in jobs (non-farm payrolls), as well as in two key leading indicators (initial claims and temporary jobs) suggests (1) continued improvement in the rate of jobs growth towards the neutral growth level of 1%/year, but (2) decelerating improvements and perhaps several years' time required to regain the previous peak employment level. This scenario is consistent with the history of previous financial crises and with the current forecast of Jan Hatzius, who has called many recent developments correctly.

This is a long entry, but it is mostly pictures. The main point is to look at several sources of evidence about where the recovery in jobs, i.e. non-farm payrolls, is going, and how long it might take to get back to a normal jobs market.

The first point is that the recovery has really only just begun. 6% of all jobs were lost in this recession, and we are only back up to a point about 5.5% below the peak:

(That bump centered at month 29 was due to the temporary Census hiring, now mostly wound down.)

Looked at another way, the jobs recovery has not even begun. The population is growing at about 1 percent per year, so we need jobs growth at that level just to keep a fixed fraction of the population employed. But the year-over-year (YOY) jobs growth just turned positive for the first time this month (again, corrected for the temporary Census hiring), and is not yet anywhere near 1%:

The same point is usually made with the month-to-month numbers. An increase of about 115,000 jobs per month is needed just to keep pace with population growth. So far this year we have seen an average, corrected for the Census hiring, of about 80,000 net new jobs per month. The last row of the table below shows monthly growth, corrected for the Census distortion. There is no encouraging trend.

Jan Feb Mar Apr May Jun Jul Aug
Uncorrected 14 39 208 313 432 -175 -54 -54
Census contribution +9 +15 +48 +66 +411 -225 -143 -114
Trend 5 24 160 247 21 50 89 60

So, we are very far from pre-recession employment, and jobs have been growing more slowly than population. What indications are there for future growth?

First, the trend in the second graph above is, thankfully, strongly upwards. So there is reason to hope that YOY jobs growth will continue to move upwards, hopefully to reach at least the neutral 1%/year level.

There are two main leading indicators for jobs growth. The first is the “temporary help services” count – the number of employees of temp agencies. The YOY change in temporary help services has typically lead the YOY change in non-farm payrolls be a few months. Here are the two series plotted together:

Since the YOY change in temporary help services is still rising, that gives some hope that the YOY change in non-farm payrolls will also keep rising for at least a few more months. One might hope to make a more quantitative statement, but it is clear that, whereas the levels of the two series (scaled as shown) have always been fairly close, that is not currently the case. It looks to me as if the relationship is not breaking down, but is being stretched. Here is a scatter plot of the two YOY series, with the last 12 months highlighted in red.

The current trajectory is clearly covering some space that has not been covered before, but it is still, apparently, following the regression line. I would guess that the trajectory will stray yet a little further from the regression line, but that the relationship will not break down. That is, I expect the YOY change in non-farm payrolls to keep rising for at least the next few months.

(Note: with recent data, the optimum lag has increased from four months to five months. This is actually a very small change – there never was much difference between evidence for 4 months and evidence for 5 months. See the bottom of the reference page US temporary jobs for the details.)

The second main leading indicator for jobs growth is initial unemployment claims. The YOY change in initial claims leads the YOY change in non-farm payrolls by about 5 months. Here are the two series plotted together.

Here the YOY change in initial claims is on an inverted scale, so the recent trough, in March 2010, shows as the black peak at the right of the graph. Such an event in initial claims is always followed by a deceleration in the YOY change in non-farm payrolls within a few months. That is just what we observe here – the YOY increases in non-farm payrolls seem to be slowing down. This, to me, is the worst news in recent employment-related data. The YOY jobs growth, still well below the neutral level, is decelerating.

Since the YOY change peaks in non-farm payrolls have been in a decreasing trend for 30 years, we can probably take the previous recession as precedent that is not too pessimistic, and may even be optimistic. In the previous recession, once the deceleration began, the YOY change in non-farm payrolls took about 3 years to reach a peak of 2%. Just as a rough guide to what might be in store, then, assume YOY growth in non-farm payrolls of 0.5%, 1.0%, and 1.5% for each of the next three years. That would imply total growth of about 3% over the next three years.

A great deal could change in the next three years, and this is a baseline scenario to think about, not a forecast. But current indicators and the precedent of the previous recession suggest it is not unreasonable that, starting from 5.5% below the previous peak, we could see only 3% growth in the next three years. In other words, a long, long road back to a healthy job market.

This is not the only line of reasoning suggesting a very slow and discouraging recovery. According to the studies of Reinhart and Rogoff on past financial crises, on average unemployment rises for 4.8 years, by 7 percentage points. If this episode were to follow the average, unemployment would peak sometime in 2011, at over 11%. Jan Hatzius, chief US economist at Goldman Sachs, and so far a very accurate forecaster of conditions in the recent recession and its aftermath, foresees 9.7% unemployment at the end of 2011. In other words, no real improvement in the next year.

For data source and further background on all the above topics, see the Reference section page US employment and its subsidiary pages.