With respect to the employment situation, given the massive job losses we observed in 2008 and 2009, we are already past the point where the impulse response curve should propagate additional job losses. Rather, in a normal post-war recovery, the normal impulse response profile suggests that we ought to be observing rapid employment gains on the order of 460,000 to 500,000 jobs a month.
Based on typical impulse response, very robust job growth would normally have been expected following the massive job losses of 2008 and 2009. From this perspective, the past three employment reports have not simply been bad - they have been among the worst job creation shortfalls on record. While not every shortfall results in a fresh wave of propagating job losses, we are observing this shortfall in the context of leading economic indicators that have already turned down clearly.
So what is the most likely outcome of this situation? In my view, the next three months represent the most serious window for the U.S. economy and labor market. The typical 23-26 week lag between leading indicator deterioration and new unemployment claims deterioration suggests that we may observe upward pressure on new claims for unemployment beginning about mid-October. As I noted last week, however, these lags can be somewhat variable, and the leading indicators tend to have a better correlation with price fluctuations in the securities market. By the time the coincident economic evidence is clear, securities markets have often completed a large portion of their adjustment.
On the positive side, while the next few months may provoke some further job losses, I suspect that the U.S. economy is already running fairly "lean" from an employment standpoint. The better leading indicators of economic activity do suggest a further round of cuts, but there is not nearly as much room for this as employers had going into the recent credit crisis. Employment losses have already been so profound that the typical impulse response actually creates something of a tailwind for the labor market, which hopefully will hold additional job losses to a tolerable level. That said, we shouldn't rely on anything close to the typical impulse response, because generally speaking, past "tailwinds" for job growth after a recession have been heavily reliant on the fresh expansion in debt-financed, large-ticket spending. This includes fixed investment, autos, durable goods, and residential investment.
Overall then, we are facing the likelihood a fresh near-term deterioration in U.S. economic activity, as part of a longer multi-year adjustment, which is typical post-credit crisis behavior. My impression is that Wall Street is eager to treat the present cycle as a "V-shaped" recovery. We see little evidence to support that view, and the best evidence we do observe is more consistent with a double-dip (if not a continuation of a single ongoing recession).
