The US economy has been leaking jobs for six straight months, seven if you exclude government hiring.
Granted, it’s been a slow leak in terms of the length of time and the magnitude of the losses (an average of 73,000 jobs a month), but there’s nothing to suggest an imminent about-face in the labour market trend. Initial jobless claims breached the 400,000 mark last week, a level consistent with the onset of past recessions. The Conference Board’s Employment Trends Index, an aggregate of eight leading labour market indicators, continued its year-long descent in June, pointing “to an even sharper deterioration in the labour market in the months ahead”, according to the conference board.
Taken in conjunction with the decline to 43.8 in the Institute for Supply Management’s non-manufacturing employment index, the lowest in its 11-year history, it’s hard to be optimistic about employment prospects.
“Labour demand is shrinking, with both the help-wanted index and the net hiring of temporary workers hitting new lows in recent months,” said Ian Shepherdson, chief economist at High Frequency Economics in Valhalla, New York. Shepherdson thinks it’s only a matter of time until the payroll numbers catch up with labour market reality.
Then again, reality as we know it could be revised.
The US Bureau of Labor Statistics uses the birth-death model to estimate new business formation that isn’t captured in the monthly survey of existing establishments. The model “isn’t cyclically adjusted”, said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. “That will bias upward non-farm payrolls when the economy is slowing.”
The National Federation of Independent Business reported that its small business optimism index fell to a record low in June, a “recession level reading”, according to the survey.
In the past year, the birth-death model estimated an increase in construction jobs in every month except November, December and January, and in finance in all months except January. How likely is it that these two battered sectors are seeing lots of start-ups? “In the 12 months ended June, total non-farm payroll fell an unadjusted 167,000,” Kasriel said. “Without the birth-death adjustment, the decline was larger than 1 million.”
Why all the focus on employment? It’s one of four coincident indicators the US National Bureau of Economic Research’s Business Cycle Dating Committee (BCDC) looks at when determining the months in which the economy peaks and troughs. Yet employment has always been first among equals. “The broadest monthly indicator is employment in the entire economy,” in the committee’s own words. It’s easy to see why. Employment is more than a job. It’s a means of support and provides a sense of psychological well-being.
News about a decline in employment and a rise in the unemployment rate affects the psyche in a way that the other three—industrial production, real personal income less transfer payments and real manufacturing and trade sales—don’t. Every time employment has declined for four consecutive months or more in the last 60 years, the US economy was either in recession or emerging from one. I doubt this time will be different.
Just think about the current state of affairs. Consumers are trapped between sky-high energy and food prices and increasingly delinquent interest payments on home, auto and credit card loans. Businesses are caught between weak domestic demand and slowing growth in the world’s major economies. Financial institutions are clamping down on credit availability. Stung by massive losses and write-downs on subprime mortgages, banks are under pressure to raise capital.
With no prospect for a near-term turnaround, the real question becomes, at what point do the employment declines gain the critical mass to warrant the official recession designation?
I posed the question to Robert Hall, chairman of BCDC, in an email this week. After emphasizing that he was “speaking as an individual member of the committee and not as chair”, he said the committee “may reach the question of what depth level constitutes a recession, but we are not there yet”.
The committee may not be there yet, but the economy most likely is. All four of BCDC’s coincident indicators peaked late last year or early this year. The trends aren’t likely to reverse soon. So, as Hall said, it’s only a matter of determining what “depth level” will suffice to make the recession official.
What about real gross domestic product (GDP), which is still growing? Real GDP rose 0.6% in the fourth quarter and 1% in the first. The meagre fourth quarter increase could turn to mush as early as 31 July, when the Bureau of Economic Analysis releases its annual benchmark revisions to the National Income and Product Accounts for the last three years.
A decline in GDP in the fourth quarter wouldn’t be the depth charge BCDC needs to designate an official cycle peak. That comes with a long lag, sometimes after the recession has ended. It would just be a confirmation for those of us who, to paraphrase economist Robert Solow, see a recession everywhere except in the GDP data.