Sunday, June 7, 2009

Reply to inquiry...

I received the email  below in reference to a quote of mine, not to a posting on this site. Still, it is a question of some common import I believe, so let me respond:

Mr Brusca you are quoted in the BCC as refering to the latest labor figures as the "Jolly Green Giant". I am wondering if you have looked at the report in detail as my brief analysis, considering only NFP total employed and average work week indicates that the May figures are worse than April's, which was a blip and also worse than March. In other words the May figures indicate a return to the earlier trend and do not even indicate a flattening of the decrease. The reduced drop in job loss is more than compensated for by the reduced average working week i.e. companies are reducing the working week rather than laying off people but the overall situation is still getting worse ? 

Several points are germane. 

First, I always look at report in detail before I comment on it. I look at the employment report each month in uncommon detail. So please... my comment is not uninformed just because it seems curious to you... I have processed the data through about six spread sheets with more charts tables and analytics than you can shake a stick at.  Let's see what's there: 

First let me point out that the FACTS: nonfarm job losses were 345K in May, 504K in April and 652K in March. Since these are job losses, employment LEVELS are progressively declining. I do not know what the emailer means when He/She says the pace of decline is slowing since the change in the change (345K-504K) in May was 159K compared to 148K for the month before. That shows that the pace of job loss is slowing. So I think our emailer has at least one critical fact wrong. It is true that in the household survey jobs actually ROSE in April then FELL in May but that is a very volatile survey (about 50% MORE volatile than the payroll survey month-to-month)  and if we smooth it, the Household survey is showing the same trends -almost exactly -- as the nonfarm report. So, let's set aside the household report, that is just plain confusing.   

The economy
Think of the economy as a car. If you miss your turn you will continue on the wrong path until you realize it. When you realize it, you will not change directions instantly or you will be part of a multi-car pile up. You will slow your progress in the wrong direction, stop and turn around to re-trace your steps to get back to where you should be. Correction is a process.  

Once you realize your error you actually are on the path to correcting your problem even if for a few blocks you continue to go 'the wrong way.' The same is true of the economy.  

Once the economy begins to shift gears, to reverse from recessionary decline to recovery, it will continue to shed jobs for a time. But it will shed them at a slower pace. Eventually it will stop shedding them and start adding them. We will not call recession over until ECONOMIC GROWTH IS POSITIVE but in the past that has sometimes happened with JOBS still declining. 

When economists look at the May jobs report, we look at the change in jobs created/lost not at the level of employment. Yes May shed nonfarm jobs and employment levels in May were 'worse than'  in April, where 'worse' means 'lower'. But the month to month decline was less in May than in April and tha is very, very good.  Indeed, the pace of job loss in May was half that in January. This is very GOOD NEWS.  

Economics is not tennis you do not take a ball going 100MPH in one direction and switch it to 100MPH in the other direction in the blink of an eye. 

As to the monthly job numbers, you must look at job changes by month, not at levels of employment or you are getting the wrong picture. Are we still in recession? Yes. But we can see the extent of repair and that is progress. That's the point.  

As to the drop in hours-worked: 'hours-worked' is not the best cyclical diagnostic for the economy. Hours are very flexible but hiring people represents a commitment. Since 1969 hours-worked (the effect of people at work plus the length of the work week, sometimes called man-hours) declined at the end of recession (long recessions or or short recessions , all mixed together) at an average of 6.6% counting from the start of the recession. Job losses alone averaged a decline of 3.3%.  That means in the average recession losses in hours-worked are more or less equally shared between job reduction and a reduction in the length of the work week. But, in this recession, counting from the recession start, jobs have fallen by 5.4% and hours worked have contracted by 'just' 7.5%. So the length of the work week did not fall by as much jobs did. Employment (unemployment) bore more of the brunt of cut backs than what is normal: nearly three quarters as much (72%) instead of half (50%). In the severe recession of 1981-82 jobs fell by 3.5% accounting for 60% of the hours-worked decline. So this isn't simply a feature of severe recessions.  

In this recession/recovery we would expect jobs to come back first since they have declined by so much more. In fact the jobs signal is a very reliable signal for when recessions start and end. The coincident economic index, after all, uses JOBS not hours-worked as its current job market measure. 

Also note that the rise in the rate of unemployment increased as job losses lessened. That is 'peculiar.' The unemployment rate is rising now MORE because of an expansion of the labor force than because of more people getting laid off. That is a good sign because people coming into the labor force are looking for jobs and typically they don't look if prospects are grim (remember these are the folks we called 'discouraged workers' in the pit of the recession.) Now they see that job hunting might pay off so they are spending time looking. Even though jobs are declining on a net basis, remember that the job market is very dynamic and in fact there is a lot of hiring/firing each month. So while people are still getting let go on a net basis it seems that hiring has picked up- but we do not yet have data to know if that is true. That sort of report lags. 

But do note that the improvement month to month in job losses was about 150K with losses trimmed to about 350K per month. If the pace of loss abates by 150K per month, after two months job loses will be down to nearly zero and after one more month we will have gains - that means we could ahve job gains in THREE month's time or by  by AUGUST!  

So when you take in the economic data be careful to look at the TRENDS. If May is really worse than April why would we be looking to job gains by August? The headlines -unfortunately -often are written by people with a political purposes or naive in their economic training. I don't want anyone to think recession is recovery nor do I want anyone to by-pass the sense of STRONG PROGRESS in the past two jobs reports.   

Unfortunately since we have two job reports, a household and payroll report, some cut through the 'confusion' to look at the rate of unemployment which seems straight-forward.  Unfortuantely it is not. Sometimes a higher rate of unemployment is the result of more economic activty, as is true this month. Labor force participation rates are rising and that is good even if it leaves more people unemployed at first. That's because a person looking for a job is more likely to get one than one who does not look. 

I was and am critical of the stimulus package adopted so don't take this note as cheerleading for Team Obama..  That package with its stimulus back-loaded is totally different from what the economy is doing. I'm not sure the stimulus package has much to do with this economic improvement but you can bet dollars to donuts who will take credit. That's the way politics work.

This is a typical end of recession dynamic. Deep long recessions tend to produce strong initial recoveries. We seem to be headed there.

Although economists do think that 'hours worked' is the superior statistic to jobs alone in order to gauge economic activity it is not the best statistic at all times.  At the end of recession you look for the best 'indicator' for growth per se and that is jobs, not hours-worked.

So I say there is a sighting of not just green shoots but of the Jolly Green Giant because he plants and grows things on a widespread basis. We are headed for recovery and headed there pretty fast. Typically in recoveries the pace of progress steps up sharply. We are getting beyond simple 'green shoots.'

That is my response. I hope the anonymous emailer and others find the reply useful.


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