Monday, September 7, 2009

The Economy's Capacity To Mint New Jobs Still A Ways Off

Since employment numbers are usually a lagging indicator, it may be a while before we see actual improvement in unemployment numbers. For now, we must settle for increasingly "less bad" unemployment. For more on this see the following post from James Picerno's The Capital Spectator.

It's getting better, or at least the pain is lessening. But no one will mistake the labor market as healthy at the moment. Nor is it obvious that salvation's coming any time soon.

Nonfarm payrolls dropped again last month. The good news is that the loss of 216,000 jobs in August was the smallest decline this year and noticeably under July's revised 276,000 retreat, the government advises today. On that basis, August represents a step in the right direction. Certainly the trend has improved considerably since the average 648,000 monthly drop that prevailed in this year's first four months.

Nonetheless, our economic outlook that we've been discussing for months remains intact. On the one hand, the technical end of the recession is imminent if it isn't already here. By that we mean several things, starting with the growing probability that third-quarter GDP will show a small gain when the government issues its first estimate on October 29. But the return of broad economic growth—meager or otherwise—will be accompanied this time by a weak labor market.

Employment growth is always among the last to revive after a recession. The difference now is that the labor market will recover later and remain subpar for longer relative to every post-recession period since World War II. Today's update on August employment offers no reason to think otherwise.

Our second chart below captures our dualist outlook for the technical end of the recession paired with an unusually slow recovery in the labor market. By indexing the trend over the past year for initial jobless claims (red line) and continuing jobless claims (black line) we can compare the two on an equal footing. Briefly, the ongoing decline in new filings for unemployment benefits signals that the recession may be near a technical end. (For some background on using initial jobless claims as one factor in predicting the business cycle's trough, see our analysis published in March.) Meanwhile, continuing claims reflect whether workers are finding new jobs after some period of existing among the ranks of the unemployed. Judging by the trend in this data, there's still no compelling reason for optimism, which suggests the economy's capacity to mint new jobs on a net basis is still a ways off. Continuing claims have come down from the peak set earlier in the year, but it's debatable if the decline is wavering.

The labor market it seems will remain the primary thorn in the economy's recovery. Consider, for instance, that labor productivity jumped sharply higher by 6.6% in the second quarter—the most since 2003, the Labor Department reports. The message here is clear: corporate America is adapting to the times by producing more goods and services with fewer workers.

As we've been writing for some time now (including here, for instance), the biggest economic challenge is still in front of us. It's been tempting to think otherwise. Yes, the worst of the financial crisis appears to be behind us and the economy seems to be on the mend in broad terms. But that good news masks the bigger challenge that awaits: reviving the labor market. Unfortunately, that's going to take more time and effort than simply cutting interest rates to zero, printing money, putting toxic securities on the Fed's balance sheet and passing multi-billion-dollar stimulus bills that create more light and heat than enduring jobs growth.

In sum, the acute problems have passed. Now we're facing the challenge of managing the chronic ailments that afflict the economy.

This post has been republished from James Picerno's blog, The Capital Spectator.

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