Friday's update on October's employment status is neither surprising nor encouraging. The U.S. economy is still bleeding jobs, but that's hardly shocking at this point. It's been clear for some time now that the risk of a jobless recovery is high.
Nonfarm payrolls shed another 190,000 positions last month, a modestly lower pace than September's 219,000 loss but still far away from anything suggesting stabilization in the labor force much less growth. Most of the job destruction came in the goods producing industries, although the services sector managed to shrink by 61,000 jobs in October. The conspicuous points of light were education and health services (a rise 45,000 jobs) and professional and business services (+18,000). But on balance, there's nothing to cheer in today's employment report other than to recognize that the pace of decline overall is considerably lower than it was during the height of the financial crisis late last year and early in 2009. Slim pickings after nearly two years of labor-market contraction.
The good news is that the magic level of zero job loss is coming, and perhaps soon. If we're lucky, it'll arrive before the year is out, although our guess at this point is that the first quarter of next year is a more likely forecast. Rest assured, stability in the labor market is near. Short of some new cataclysmic change in the current economic profile, the stars are aligned for an end to the job destruction that has been nonstop since January 2008. Alas, the bigger problem is not ending the job destruction; rather, the bigger challenge will be minting new jobs.
As of last month, the U.S. economy has lost 7.3 million jobs, or more than 5% of total nonfarm payrolls in December 2007, when the recession began. Given the hefty monetary and fiscal stimulus that's coursing the economy, job destruction can't go on for much longer without a dire change for the worse in the current conditions. We don't foresee such a change and neither do most economists. The positive pull of a rising GDP, as implied by the robust 3.5% annualized growth in the economy in Q3, will act as a brake on further job loss in 2010. Indeed, the natural tendency of the economy to right itself after the recent contraction, along with the liquidity injections from the government, will soon stem the loss in nonfarm payrolls. Yesterday's fall in initial jobless claims suggests as much. New filings for unemployment benefits dropped to the lowest weekly level last week since January.
The great challenge is what comes after the arrival of zero change in the labor market. Turning it into something sustainably positive of some magnitude promises to be one of the biggest macroeconomic policy problems since the Great Depression. One of the dangers associated with this future is minimizing its potential for havoc, if not ignoring it altogether. As the job losses fade on a monthly basis and eventually reach zero and move into modestly positive territory, the crowd's initial reaction is likely to be one of celebration. That is likely to be premature.
Afterward, once reality sets in, the potential is high for ill-advised macroeconomic responses intent on fixing the problem. As the political establishment comes to grips with the future, the body politic will respond with its usual array of poor economic decisions. That penchant has been suppressed for much of the past generation, thanks to strong economic growth that expanded the U.S. labor market. But with a jobless recovery in the offing, and perhaps for some extended period, Washington's inclination to act, and in ways that may be less than economically productive, will grow stronger.
Meantime, corporate America is learning how to be more productive with fewer workers, which bodes ill for hiring, at least for the moment. Nonfarm business sector labor productivity increased at a 9.5% annual rate during the third quarter of 2009, the Bureau of Labor Statistics reported yesterday. This was the largest gain in productivity since the third quarter of 2003, when it rose 9.7%.
Creating jobs on a scale that Americans have come to expect in post-recession periods will prove difficult this time around. At the same time, the non-labor-market recovery will proceed apace, giving rise to what threatens to be the greatest divide between main street and Wall Street in decades if not in all of American economic history.
The biggest challenge, in short, is yet to come. Meantime, first things first: we're still waiting for the job destruction to end after 22 months.
This post has been republished from James Picerno's blog The Capital Spectator.
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