Monday, August 4, 2008

Job market is no recession counterpoint

The June jobs report allayed some fears of recession.

It shouldn't have.

If this is a recession that began in December of 2007 as many suggest, then as of its eight month it displays the third smallest job losses of any recession since 1960. The average recession drops the level of jobs from their threshold recession level by 1.5%. Currently jobs are lower by only 0.3%. In the eighth month of recession. In the eight month of the 1960 and in the 1973 contractions jobs fell by less. They were still recessions. The 1960 recession tuned out to be a recession of relatively light job losses (jobs fell by only 1.2% at their worst) but at 1.6% the losses in the 1973-75 downturn were a bit worse than average.

Still recession severity cannot be told by the depth of job loss alone. Recessions are about the economy at large the depth, breadth and length of the economic slowing of all sorts, not just the job market. The three metrics of breadth. depth and length are the key applied across all sectors.

But job losses alone do not even tell us the full scope of labor market weakness. Since the economy had different job growth momentum coming into each of these previous recessions the true impact is not just job losses. It is the shift in job growth that tells a better story of disruption.

Since 1960, in recessions monthly job growth slowed by an average of 263,000 compared to the 4-9 month average gain prior to the recession's start. After the first four months of recession the down shift in job growth intensified to being 331,000 slower than its pre-recession period.

Each recession period has seen a minimum shift in job growth of at least -400K in the recession compared to pre-recession monthly growth. The average maximum monthly job slowing in recessions creates one-half of one million jobs less in the worst month compared to the pre-recession average.

The 2008 experience is like the 1973-75 experience in that the slowdown in job growth is not severe. Although jobs are declining steadily, the slowing from the pre-recession environment shows a shift in growth of only -156,000 on average. In 1973 jobs did not slow from their pre-recession pace appreciably until the 13th month of recession. But then weakness came on with great severity. The average slowdown in the first eight months of recession in 1973-75 was even less than what it is now. But the 1969 recession appears as more severe on this metric. So the 2008 recession does not stand alone it does stand as most similar to the last oil price/embargo induced recession of 1973-1975.

In 2008 there has been little evidence of acceleration in job losses and that is what is perplexing even though that result is not unprecedented in recessions.

In 2008, however there is also evidence that economic weakness is still spreading. The Challenger Announced Corporate Layoff data show that the layoff trend is on the rise. Vehicle sales have been slowing as well to an anemic 12.55mu sales pace in July. Arguably the economy was slowing on the housing situation and financial troubles coming into 2008 then spiking oil prices pushed it over the limit. I look at the economy as successfully having fought off recession from housing and the financial sector problems but as now succumbing to the impact of strong oil prices. The rebates hardly have helped. By and large they have been saved by the consumer. These multiple attacks on the economy account for its slow or herky-jerky recession start.

But we still think it is a recession and we think it is going to develop metrics more like past harsh recessions.

Jobless claims are spiking, announced corporate layoffs are high and rising, the unemployment rate is up sharply. Consumer spending on durables is sharply lower and consumer confidence is off. The signs are clear and uniform in their message. Why ignore them just because of job patterns (that have not even undergone their final revisions) don't look exactly as they have in most past recessions? They are after all close enough and other supporting signals should be clear enough.

Still don't think it looks like a recession?

Just wait.

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