Jobless Recovery - A brief overview

Tuesday, August 11th, 2009

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The employment report of July, published on August 7, included several signs suggesting that the labor market is stabilizing. The next question is what comes after stabilization. Historically, payroll employment has posted gains within 12 months into a recovery/expansion and gathers significant momentum by the end of 24 months in all post-war business cycles with the exception of the 1991 and 2001 recoveries (see table 1). The January - July 1980 recession was a short recession followed by another recession in July 1981. The 1991 and 2001 recoveries have been coined as ‘jobless recoveries’ based on the nature of the growth of payroll employment and the changes in the jobless rate.

Table 1 Change in Payroll Employment from Trough of Business Cycle

The unemployment rate typically peaks after a recession; the computations in table 2 would be different in magnitude if the peak of the jobless rate were considered instead of the jobless rate that prevailed at the trough of the business cycle. However for purposes of comparison, table 2 is constructed around troughs of the business cycle. As shown in table 2, the unemployment rate declined at the end of twelve months in all post-war recoveries with the exception of the 1970, 1991, and 2001 recoveries. The 1991 and 2001 recoveries are marked with a prolonged increase of the unemployment rate even after 24 months of the official date of an economic recovery.

Table 2 Change in Unemployment rate from Trough of Business Cycle

There is a growing consensus that the recovery this time around is most likely to be a jobless recovery. Research from the Federal Reserve Bank of San Francisco (Jobless Recovery Redux?) confirms this view. One of the reasons for the pessimism cited in this research is that involuntary part-time employment is high which implies that employers can extend hours of these part-time employees when the recovery occurs instead of increasing payrolls.’

More importantly, the course of monetary policy in a jobless recovery will be a challenge given the Fed’s extraordinary easing in place. In the 1991 recovery, the Fed held the funds rate at 3.00% from September 1992 to February 1994. The unemployment rate had declined to 6.6% from a high of 7.8% when the Fed embarked on a tightening path. In the 2001 recovery phase, the Fed lowered the federal funds rate to 1.75% by December 2001 and eased further to 1.00% by June 2003. The federal funds rate held at 1.00% between June 2003 and June 2004. The Fed commenced tightening in June 2004 when the unemployment rate had dropped to 5.6% from a cycle high of 6.3%. This time around, the Fed may not be in a position to wait until the unemployment rate has dropped by a significant measure before it unwinds the programs put in place to stabilize the financial system. In addition, the Fed is sensitive to criticism pertaining to the delayed tightening in 2004. At the same time, the risk case now is that of tightening monetary policy later rather than sooner given the severity of the current crisis and its ramifications.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Tags: Business Cycle, Business Cycles, Comparison Table, Computations, Economic Recovery, Employment Report, Federal Reserve Bank, Federal Reserve Bank Of San Francisco, Jobless Rate, Jobless Recovery, Northern Trust Company, Part Time Employment, Payroll Employment, Pessimism, Post War, Recession, Redux, Time Employees, Troughs, Unemployment Rate
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NFP = 18,000

Friday, January 4th, 2008

Barry Ritholtz’s blog The Big Picture featured this story today, Non-Farm Payroll (jobs) grew by a stunningly disappointing 18,000, which further reinforces the likelyhood the Fed will cut, probably by at least 50bps at the next FOMC meeting, on the back of this recessionary news.  
 
Mr. Ritholtz’s highly acclaimed blog is by far one of the best on the web.

Wow, that’s a pretty ugly chart above.

Here are the details, via BLS:

“The unemployment rate rose to 5.0 percent in December, while nonfarm payroll employment was essentially unchanged (+18,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today.

Job growth in several service-providing industries, including professional and technical services, health care, and food services, was largely offset by job losses in construction and manufacturing. Average hourly earnings rose by 7 cents, or 0.4 percent.”

So, December NF Payrolls rose much less than expected, up a marginal 18,000 — or as BLS described it, largely unchanged – versus a consensus of 70,000. This was the lowest reading since August 2003. Construction job losses are now finding their way into the data, regardless of the aforementioned Birth Death adjustment.

Unemployment rate rose to 5.0%, the highest in 26 months. As we have noted repeatedly in past months, to keep up with population growth requires ~150k new jobs to be created each month. Given the number of months we have seen below that level, an uptick in unemployment was inevitable.

The spin coming from the usual sources will be that this poor showing was the result of the August credit crunch, and is therefore likely to be a temporary phenomena.

I disagree. 

These same folks will point to the increasing odds of a 50 bps cut at the January meeting. Those futures have risen to 44% from 36% yesterday. Unfortunately, the Fed finds itself somewhat hamstrung by elevated inflation, $100 Oil and $850 Gold as signs proof of inflation.

~~~

Coming on top of the slowing Housing market, weak income levels, ISM manufacturing index, and auto sales, this is further evidence to the building thesis that a recession is increasingly likely.Sources:Employment Situation Summary   
BLS, DECEMBER 2007
http://www.bls.gov/news.release/empsit.nr0.htm 

   BLS, DECEMBER 2007http://www.bls.gov/news.release/empsit.nr0.htm    BLS, DECEMBER 2007http://www.bls.gov/news.release/empsit.nr0.htm  

Fed’s Inflation Fears Might Trump
Calls for Another Big Rate Cut Monetary-Policy Makers
Appear to Have Less Room To Maneuver Than in Past
GREG IP
WSJ, January 4, 2008; Page A3
http://online.wsj.com/article/SB119940394997266181.html

Tags: Average Hourly Earnings, Barry Ritholtz, Birth Death, Blog, Bureau Of Labor, Bureau Of Labor Statistics, Chart, Construction Job, Credit, Credit Crunch, Credit Market, Desc, Earnings, Economy, Fed, Food Services, Gold, Housin, Housing Market, inflation, Likelyhood, New Jobs, Next Fomc Meeting, Nfp 18, oil, Payroll Employment, Population Growth, Recession, REW, risk, Services Health, The Big Picture, Thesis, U S Department, U S Department Of Labor, Unemployment Rate, Uptick
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