Tuesday, January 19, 2010

2010 Economy Faces Significant Headwinds

One of the headwinds facing the economy in 2010 is the slow jobs market that is likely to take a long road to recovery. The sliver of hope is in the closing gap between job separations and new hires, although long-term unemployment has reached the highest level since 1948. See the following from The Capital Spectator.

The U.S. labor market is far from healthy, and the prospects are low for changing that diagnosis any time soon. But there’s a small ray of hope for thinking that the net loss of jobs is over and maybe, just maybe, some degree of expansion is near. Last week’s update on new hires is one of the positive smoking guns for expecting a better job market in the weeks and months ahead, if only marginally so.

It’s hard to overestimate how much influence the labor market will color the details of the economy in 2010. Suffice to say we’re at the point that the trend in jobs will have an outsized effect on what unfolds in the year ahead, for good or ill. A surprisingly strong recovery? A double-dip recession? Or something in between? We think the third choice is the right answer, although there’s a lot of play even there in terms of the details. In any case, much of the true answer will come via the labor market, now more than ever.

On that note, there are some statistics that are encouraging, albeit with all the usual caveats. Nonetheless, the upturn in the so-called hires rate in the economy provides a small bit of light in a dark tunnel. As the chart below shows (courtesy of the Labor Department), the new hires rate continues to rise off the bottom established in mid-2009. A pick-up in job creation, in other words, appears to be gaining momentum.

The problem is that the economy is still losing more jobs than it creates, i.e., the separations rate (the ratio of employment terminations to total workers employed) has been sticky on the upside. But the gap between hires and separations is closing. Is there enough momentum in the recent rise in new hires to overtake separations in the months ahead? Perhaps. If so, the shift will reflect a minor milestone in favor of growth.

Of course, we should be cautious in expecting too much too soon. Charles Thibault of Wanted Analytics considered the positive implications via a rise in new hires back in September. But the optimism, even though it was statistically warranted, was premature. The net change in nonfarm payrolls was still down in December.

Midway through the first month of 2010, there are enough headwinds facing the economy to keep our expectations in check. That includes the dire trend in the tally of the long-term unemployed (out of work for 27 weeks or more), which hit the highest rate since 1948, when data on this series was launched. Forty percent of the unemployed were jobless for 27 weeks or more last month, according to the Labor Department. “This is not your typical cyclical downturn where hiring is just postponed until business improves,” Richard DeKaser of Woodley Park Research tells the Christian Science Monitor. “This is really more about structural unemployment.”

The economic rebound faces “three significant headwinds,” Eric Rosengren, president of the Boston Fed, warned earlier this month: weak lending by banks, cautious consumers and a slow recovery in the labor market. “It appears that this recovery will likely experience only a slow improvement in the employment picture, and that the unemployment rate will remain quite elevated during the early phases of the recovery,” he said. “GDP growth is expected to be strong enough to produce some employment growth, but that rate of employment expansion will not likely be rapid enough to put a large dent in the unemployment rate.”

Even the most optimistic forecasters must face facts: It’s going to be a long year.

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

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