The Rare Occurrence Of The Jobless Recovery

Although in the past, peaks in unemployment emerged shortly after the end of economic recessions, this will not be the case for the current recession. This time, it looks like unemployment will not reach its peak for a while and the labor market will take much longer than usual to recover. See the following post from The Mess That Greenspan Made.
Writing in this morning's WSJ Ahead of the Tape column($), Mark Gongloff observes that "jobless recoveries" are a relatively new development.

The time-worn Wall Street gospel is that employment is a lagging indicator, but that isn't always so. It has only lagged significantly in the recoveries that followed the past two recessions.

In the eight recessions between World War II and 1982, payrolls bottomed and unemployment peaked, on average, less than one and two months, respectively, after the recessions ended.

Assuming, as most economists do, that the latest recession technically ended in June 2009, this recovery already is looking jobless.
...
Economists, on average, expect unemployment to peak in February 2010 -- eight months after the recession's assumed end. Even that forecast might be optimistic.

Yes, that's a typo in the graphic above (something that seems to happen quite a bit these days). It should say "Nov. 2001" as the end date for the last recession.

In chart form, the situation is as shown below via the Kansas City Federal Reserve.

Those sharp declines in unemployment following all recessions right up through the 1982 downturn represent an economy that is quite different than the one we have today.

Naturally, the differences were viewed as a good thing during the last two recessions when unemployment peaked at relatively low levels.

Now that we're challenging the early-1980s peak in unemployment with a return trip to lower levels of joblessness likely to come at a sluggish pace, these differences are taking on a whole new connotation.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

The Case For A Jobless Recovery

Even as some indicators point to an economic upturn, the employment sector has faltered. Without job opportunities to accompany the positive forecasts, intervention may be needed to prevent a long and painful recovery. The following post from Economist's View discusses the mounting evidence that a jobless recovery will take place.
Each year, Tim Duy organizes the Oregon Economic Forum, and this year he invited David Altig of the Atlanta Fed to talk about monetary policy. I'll be discussing fiscal policy, and one of the questions I'll address is whether more stimulus is needed. The poor condition of job markets will be a key part of that discussion, and this post of David's at macroblog provides additional evidence that the odds of a jobless recovery are increasing:

The growing case for a jobless recovery, by David Altig: The Wall Street Journal repeats the unhappy news:

"Companies across the economy are holding off on hiring even as the profit outlook improves, amid economic uncertainty and their own success at raising productivity in rough waters.

"Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment, even though the government is expected to report next week that the economy grew in the third quarter, after four quarters of contraction."

I'd like to be able to contradict what most forecasters expect, but we at the Atlanta Fed have been building the case for a similar outcome on macroblog. Here are few salient points from previous posts.

Job opportunities are scarce. (Oct. 14, 2009)

"At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low."

This development could, of course, turn around as business activity picks up, but there is more than a little evidence that some structural impediments are afoot.

Job losses have been disproportionately concentrated in small businesses. (Oct. 6, 2009)

As Melinda Pitts pointed out a few weeks back, businesses with fewer than 50 employees account for about one third of net employment gains in expansions. They have accounted for about 45 percent of job losses since the beginning of this recession. Given that these are the types of businesses most likely to be dependent on bank lending—and given that bank lending does not appear poised for a rapid return to being robust—the prognosis for an employment recovery in these businesses is a question mark.

The share of workers reporting that they have been involuntarily cut back to part-time is at a recorded high. (Aug. 14, 2009)

"… the increase in people reporting that they are involuntarily working part-time rather than full-time is considerably higher in this recession than in past recessions. Although the increase in these workers has moderated some since the spring of this year, the number of people in the category of working part-time for economic reasons remains at 8.8 million, well above the level of past contractions in both absolute and relative terms."

One potential implication of this fact is that firms probably have the capacity to expand production without hiring new workers (or increasing worker productivity). All these firms have to do is give more hours to existing workers, who have indicated they would be plenty eager to have them. Good for them—and good for GDP growth—but not much help on the employment front.

Here is one additional concern that we have not previously emphasized.

The percentage of employee separations labeled permanent is at a recorded high.

Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.

The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:




Of course, none of this is proof positive that we are in for a "jobless recovery," but, to me, the odds appear to be increasing.

I wish I would have had the last graph when I made up the slides (pdf) for the presentation.
This post has been republished from Mark Thoma's blog, Economist's View.

Too Much Competition For Job Openings

The economy continues to destroy jobs at a much faster pace than it is creating jobs. The ratio of unemployed workers to job openings has skyrocketed by over 200% since 2007, which means greater competition for fewer jobs and longer periods of unemployment. See the following post from Economist's View.

The ratio of the number of unemployed to the number of job openings suggests that the current weakness in labor markets is likely to persist:

A look at another job market number, Macroblog: ...At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low. This is an especially significant issue given the large number of people who are looking for work. The ratio of the number of unemployed to the number of job openings was greater than 6 in August. In contrast, that ratio was under 1.5 in 2007 and previously peaked at 2.8 in mid-2003, suggesting that finding a job right now is extremely difficult...



The quit rate moved back down to its record low of 1.3 percent, as relatively few people want to leave a job voluntarily in the face of such a weak labor market. At the same time, the rate of involuntary separations moved up from 1.6 percent to 1.8 percent, not far below the peak of 1.9 percent in April.

The low probability of finding a job has also caused the average amount of time spent unemployed to rise substantially. ...

Labor markets need more help. This article has been republished from Mark Thoma's blog, Economist's View.

Consequences Of Stimulating Employment

Mark Thoma discusses how a hiring incentive given to businesses can have negative consequences by distorting the optimal allocation of labor during a period of economic change. This helping hand could be like helping a butterfly out a cocoon, which reduces the struggle, but prevents the necessary development needed to complete the metamorphosis. Continue reading to learn more.

There has been a bit of a pushback, both implicit and explicit, to calls to implement policies to accelerate hiring. For example, Jim Hamilton recently noted an old theory of his where some types of unemployment cannot be overcome through standard stimulative policies (this was in response to a question about whether Arnold Kling's recalculation model can explain asymmetric adjustment, but I am focusing on the technological and physical constraints present in both Hamilton and Kling's model, not whether the asymmetries can be explained):

Will stimulating nominal aggregate demand solve our problems?, by Jim Hamilton: ...[I]n 1988 ... I presented a model in which unemployment arises from a drop in the demand for the output of a particular sector. The unemployed workers could consider trying to retrain or relocate, or might instead decide to wait it out in hopes that the demand for their specialized skills will come back. ...[T]he key kind of unemployment that I think this sort of model describes-- waiting for an opening in the particular area in which you've specialized-- is caused by drops in demand...

Insofar as the frictions in that model are of a physical, technological nature, increasing the money supply would simply cause inflation and not do anything to get people back to work. I should emphasize that I built that monetary neutrality into the model not because I think it is the best description of reality, but in order to illustrate more clearly that there is a type of cyclical unemployment that stimulating nominal aggregate nominal demand is useless for preventing.

My personal view is that real-world unemployment arises from the interaction of sectoral imbalances with frictions in the wage and price structure of the sort documented by Truman Bewley and Alan Blinder. The key empirical test, in my opinion, is at what point inflationary pressures begin to pick up. If Krugman is correct, we could have much bigger monetary and fiscal stimulus without seeing any increase in inflation. If the sectoral imbalances story is correct, it would be possible for inflation to accelerate even while unemployment remains quite high. ...

Thus, according to this view, some part of the sectoral imbalances in of a "physical, technological nature," and standard demand side policy does not help. Policy may be able to induce people to stop sticking around for jobs that will never materialize and move on, but those typically aren't the kinds of policies typically associated with stimulating employment, e.g. tax credits to encourage hiring.

A new colleague of mine, Nick Sly, emails that it is not always optimal, from a long-run economic growth point of view, to provide incentives for firms to hire workers, how those incentives are structured is crucial:

There is a paper on my website called Intraindustry Trade and the Composition of Labor Market Turnover. (It is a heavily revised version with more of a trade focus.) The highlights of the paper are:

1. Because of constant turnover in labor markets, hiring costs are persistent for all firms.

2. Turnover and Hiring occur both because firms update their workforce (job creation costs) and to replace workers who leave for reasons unrelated to the firm (worker hiring costs). These phenomena are distinct 3. (KEY) I show (theoretically and confirm empirically) that each source of turnover has the opposite effect on the incentives of firms to adopt state-of-the-art production techniques. As a consequence industries with different compositions of labor mobility have varying degrees of engagement of foreign markets.

The relevance:

The act of hiring workers could be the result of demand side (firms creating new jobs) or supply side (workers need to be replaced) incentives. We may not want to jump too quickly to put people back to work if it means employing less productive production methods. The short term gains can be lost as poor matching of workers and adoption of weak production methods alter the recovery path.

I believe that the timing of the hiring tax credits, and the sort of hiring it promotes (i.e. creating new vacancies versus filling previously existing positions), will determine the long-run consequences of such a policy.

Let me try to express the main point a different way. When firms hire workers, as they are constantly doing, they have a choice between using old or new technology, and the way in which hiring incentives are structured can affect this choice. As we think about putting programs to induce firms to hire workers in place, we need to be sure that we are not giving firms the incentive to use old rather than new technology so that economic growth is maximized, and we also need to be sure that we don't distort the choice firms make toward labor intensive rather than growth maximizing change.

Our economy faces lots of adjustments as it recovers from the recession, far more than in some past recessions when we could return, pretty much, to what we were doing before the shock hit. But not this time. We have adjustments in the auto, finance, and housing sectors just for openers, and there are other underlying adjustments that are in progress as well (e.g. in the manufacturing sector). As these adjustments occur, it's important that we don't impede the necessary change, or induce firms to make suboptimal choices as we attempt to induce them to hire more workers.

But if we give firms the time they need to make the changes that are needed, there will be excess labor during these adjustment periods, both from sectoral reallocations and from technological change. The question is what we are going to do to help people who lose their jobs or are otherwise negatively affected by these transitions.

One choice is to induce firms to house the excess labor during this time period through tax or other inducements, but the danger is that in doing so you distort the choices of firms away from the optimal trajectory. Another choice is for the public sector to absorb much of the burden by providing jobs to the unemployed and providing the aid needed to carry workers through the adjustment period (and we can also provide incentives for workers to relocate in areas where they have a better chance of finding employment).

Even better, though, is to structure the incentives so that the technological change is encouraged by the hiring of new workers. For example, Nick Sly suggests that the hiring credit be only for "new" jobs offered by firms, somehow defined, because this gives firms an incentive to both hire new workers and to employ the latest technology. Thus, the best choice of all is to provide incentives to employ workers that have, as a byproduct, and inducement to maximize technology and economic growth, and then use public employment (e.g. infrastructure) or aid to help those who remain unemployed.

No matter what we do, however, there will be those who cannot find employment during these time periods, and we need to do a better job than we do in helping those who, through no fault of their own, are caught up in the tumultuous change that sometimes occurs in modern economies.

This post has been republished from Mark Thoma's blog, Economist's View.

Expect Several More Months Of Job Losses

The unemployment market will be a economic headwind as job losses are expected to continue for several more months according to Joel Prakken, chairman of Macroeconomic Advisers. The worst episode of job destruction since the Great Depression will require a massive cleanup before the economy can reach full speed again. See the following post from Capital Spectator.

It's all about employment now. More of it would be better, although we may have to settle for losing it a slower pace for a bit longer.

The U.S. Labor Department will dispatch the official update for September nonfarm payrolls on Friday. Meantime, dismal scientists, pundits and fans of macabre labor stats are making estimates and crunching the numbers on hand.

Wanted Technologies, an employment analytics firm, expects that nonfarm payrolls will fade by 167,000 in September. If so, that would be an improvement over August's loss of 216,000 jobs, albeit a relative improvement.

Absolute improvement, unfortunately, doesn't look imminent. The ADP employment report released this morning advises that the employment rolls shed 254,000 in September. That's better than the 277,000 loss in August, as per ADP, but we're still stuck in the land of relative progress and the odds of returning to Kansas quickly still look slim.

Julia Coronado, senior U.S. economist at BNP Paribas in New York, states the obvious when she tells Bloomberg News that “the state of the labor market is still very weak” and job destruction is “weighing on wages and income,” which remains a "headwind to growth.”

Joel Prakken, chairman of Macroeconomic Advisers, says bluntly that the crowd should be prepared for more losses for the foreseeable future. Although the rate of loss has been diminishing, "employment, which usually trails overall economic activity, is likely to decline for at least several more months, with losses continuing to diminish," he says via MarketWatch.com.

If September's payrolls give ground once more, as seems likely, that'll mark the 21st consecutive month of job destruction for the U.S.—a record string of retreats since the Great Depression. The pain will end soon, but not yet. Then comes cleaning up the mess.

As we've been discussing for some time, the real challenge still awaits. Ending the job loss is critical, of course, but pulling the labor market out of its hole by way of net employment growth on a national basis is a much bigger hurdle. Alas, as Friday's numbers are likely to show, that all-important task is still premature in terms of topical issues du jour.

This post has been republished from James Picerno's blog, The Capital Spectator.

Breaking Down September's Jobs Numbers

The new filings for jobless benefits are still very high, but both new claims and continuing claims are trending downward. James Picerno from The Capital Spectator breaks down the latest numbers and why the downward trend is not necessarily an indicator of recovery. See the following post for more.

This morning's update on initial jobless claims offers more encouragement for thinking that the economic contraction has bottomed out. That's still distinct from proclaiming the arrival of a recovery worthy of the name, as we've been discussing for months, including here and here. Nonetheless, the downward trend in initial jobless claims—a valuable leading indicator of the business cycle, as we explained back in March—continues to signal that the recession on a broad macro scale is over or nearly over.

Granted, last week's decline in new filings for jobless benefits to 550,000—the second-lowest so far this year—may be skewed because of this past weekend's Labor Day holiday. As always, we'll have to wait for more number crunching by our trusty servants in Washington. Meantime, the chart below doesn't give us any reason to think that initial claims aren't biased toward lower levels in the future, albeit erratically and slowly, but downward nonetheless.



Another encouraging trend in today's unemployment numbers arrives by comparing initial claims with so-called continuing claims, by far the higher number of the two. Indexing this pair to measure the trends on an apples-to-apples basis suggests that we're finally seeing some progress in reducing continuing claims, as our second chart below shows.



Continuing claims reflect the ranks of the unemployed who've previously been collecting jobless benefits. A decline in this series suggests—emphasis on "suggests"—that people who've been on the unemployment rolls are finding work. Generally speaking, a decline in initial jobless claims is all the more persuasive if continuing claims are falling too. As the second chart directly above suggests, there now appears to be greater downward momentum in both series, which is encouraging, at least on its face.

We qualify the last point because it's not yet clear if the decline in continuing claims is a quirk. One possibility is that continuing claims is falling for less than bullish reasons. For example, the shrinking number of continuing claims may reflect that the jobless are falling off the government's radar because their unemployment benefits have expired.

In short, the data looks mildly encouraging as reported but we're still a long way from declaring the Great Recession over as it relates to Main Street. (Wall Street's perspective is another story.) But this much is clear: a recovery of some degree in the labor market is critical in order to repair the damage of the past year or so. Today's numbers tell us there's still a lot of pain, but at the very least today's report suggests that the trend isn't getting any worse and maybe, just maybe, it's getting marginally better.

This post has been republished from James Picerno's blog, The Capital Spectator.

The Economy's Capacity To Mint New Jobs Still A Ways Off

Since employment numbers are usually a lagging indicator, it may be a while before we see actual improvement in unemployment numbers. For now, we must settle for increasingly "less bad" unemployment. For more on this see the following post from James Picerno's The Capital Spectator.

It's getting better, or at least the pain is lessening. But no one will mistake the labor market as healthy at the moment. Nor is it obvious that salvation's coming any time soon.

Nonfarm payrolls dropped again last month. The good news is that the loss of 216,000 jobs in August was the smallest decline this year and noticeably under July's revised 276,000 retreat, the government advises today. On that basis, August represents a step in the right direction. Certainly the trend has improved considerably since the average 648,000 monthly drop that prevailed in this year's first four months.



Nonetheless, our economic outlook that we've been discussing for months remains intact. On the one hand, the technical end of the recession is imminent if it isn't already here. By that we mean several things, starting with the growing probability that third-quarter GDP will show a small gain when the government issues its first estimate on October 29. But the return of broad economic growth—meager or otherwise—will be accompanied this time by a weak labor market.

Employment growth is always among the last to revive after a recession. The difference now is that the labor market will recover later and remain subpar for longer relative to every post-recession period since World War II. Today's update on August employment offers no reason to think otherwise.

Our second chart below captures our dualist outlook for the technical end of the recession paired with an unusually slow recovery in the labor market. By indexing the trend over the past year for initial jobless claims (red line) and continuing jobless claims (black line) we can compare the two on an equal footing. Briefly, the ongoing decline in new filings for unemployment benefits signals that the recession may be near a technical end. (For some background on using initial jobless claims as one factor in predicting the business cycle's trough, see our analysis published in March.) Meanwhile, continuing claims reflect whether workers are finding new jobs after some period of existing among the ranks of the unemployed. Judging by the trend in this data, there's still no compelling reason for optimism, which suggests the economy's capacity to mint new jobs on a net basis is still a ways off. Continuing claims have come down from the peak set earlier in the year, but it's debatable if the decline is wavering.



The labor market it seems will remain the primary thorn in the economy's recovery. Consider, for instance, that labor productivity jumped sharply higher by 6.6% in the second quarter—the most since 2003, the Labor Department reports. The message here is clear: corporate America is adapting to the times by producing more goods and services with fewer workers.

As we've been writing for some time now (including here, for instance), the biggest economic challenge is still in front of us. It's been tempting to think otherwise. Yes, the worst of the financial crisis appears to be behind us and the economy seems to be on the mend in broad terms. But that good news masks the bigger challenge that awaits: reviving the labor market. Unfortunately, that's going to take more time and effort than simply cutting interest rates to zero, printing money, putting toxic securities on the Fed's balance sheet and passing multi-billion-dollar stimulus bills that create more light and heat than enduring jobs growth.

In sum, the acute problems have passed. Now we're facing the challenge of managing the chronic ailments that afflict the economy.

This post has been republished from James Picerno's blog, The Capital Spectator.

Why Employment Should Not Be The Number One Concern

Economist Andy Harless discusses why job loss is not the biggest problem facing the economy right now but a necessary part of the natural cycle of economic growth. He also explains how unemployment will help prevent inflation that many analysts are worried about. For more on this see the following post from Economist's View.

Why has the rate of both job creation and job destruction been falling in recent years?

Job Losses Are Not the Problem, by Andy Harless: It is sometimes argued that recessions benefit the economy by allowing the destruction of old, inefficient economic structures so that newer, better ones can be created to replace them. On the surface, this story might seem to apply to the recent recession: ostensibly, a lot of useless jobs in finance, real estate, and construction were destroyed, as well as perhaps old manufacturing jobs that hadn’t caught up with the latest technology, and jobs in retail trade that needed to be replaced by the Internet, and so on. But there’s one problem with that point of view: overall (at least during the first four quarters of the recession, up through the end of 2008, for which we have the relevant data), there weren’t an unusually large number of total jobs being destroyed.

But...but...but...haven’t we been hearing about large numbers of job losses month after month since the recession began? Sort of. We’ve been hearing about large numbers of net job losses. That is, the number of jobs that have been lost has been a lot more than the number that have been created. And a lot of job losers have ended up collecting unemployment insurance for a long time, sending the figures for continuing claims up to records, instead of getting new jobs. But the gross number of jobs being destroyed has not been unusually large. In fact, relative to the overall level of employment, job destruction was happening at a faster rate during the boom of the late 1990s than it was during the last quarter of 2008.

How can that be? For one thing, when you take out the business cycle, there seems to have been a general downward trend in the rate of job destruction over the past 10 years. More important, the rate of job creation also had a downward trend, and it dropped to new lows during the recession of 2008. If you lost a job in 1999, you weren’t actually all that atypical, but it wasn’t a big problem, because typically, you could find a new job fairly easily. If you lost a job in 2008, you were (typically) out of luck.

Source: Business Employment Dynamics data from the Bureau of Labor Statistics

The fact is, job creation and job destruction take place during booms at rates that are not dramatically different from the rates during recessions. It’s just the difference between the two that changes. In a typical boom quarter, about 7 million jobs are destroyed, and about 8 million are created. In a typical recession quarter, about 8 million are destroyed and about 7 million are created. There just isn’t much support for the idea that recessions give us a special ability to reallocate resources more intensely than we do during a boom or a period of normal growth. “Creative destruction” is a dynamic process that continues all the time, not one that occurs in separate phases of creation and destruction.

And the most salient feature of the current episode is that there has been unusually little creation. From the 1990’s to the 2000’s, the quarterly job creation rate fell from about 8% to about 7%. Since 2006, it has fallen to about 6%.

Some might argue that this type of slowdown in job creation is inevitable during times of structural change and that it is useless to try to oppose it with monetary and fiscal policy. It takes a long time (Arnold Kling, for example, would argue) for the economy to come up with ideas for new, productive uses of resources when the old uses are no longer productive. Monetary and fiscal policies can’t do much to speed up this process. They can’t make entrepreneurs more creative.

I’m skeptical of that view: entrepreneurs were plenty creative during the 90’s, once the booming stock market gave them a reason to apply their creativity. Monetary policy really did help speed up the process of finding new uses for resources: low interest rates led to high equity prices, which made it easy to raise capital and thereby made it advantageous to find new ways of using capital. Some would say the process went too fast in the end, with a large fraction of the uses proving ultimately unproductive, but statistics show aggregate productivity rising rapidly and continuing to rise during the subsequent years, even (atypically) during the recession that immediately followed the boom. There may have been a lot of froth, but there was plenty of good beer underneath, and monetary policy is what opened the tap.

In any case, even if I were to concede that monetary and fiscal policies don’t help speed up the adjustment process, they do help us get the most out of the economy in the mean time. With nearly 10 percent of the labor force unemployed, there are a lot of resources being wasted – people spending their time looking for jobs that many of them just aren’t going to find until we get a lot more economic activity. There are plenty of useful things that those people could be doing in the mean time.

Perhaps more important, monetary and fiscal policies help us reduce the risk that a weak economy – too weak for too long – will fall into a deflationary spiral. As long as job creation remains weak, employers have little incentive to raise wages, and competition will tend to push down prices. Even an “artificial” stimulus, one that doesn’t accelerate the structural adjustment process, will create a demand for labor and force employers to compete somewhat for workers. That competition, in turn, will prevent them from competing too aggressively in product markets and keep prices reasonably stable.

There is, of course (in theory, at least), the risk that policies will go too far and not just prevent deflation but produce excessive inflation. As I have argued before, we are nowhere near that point right now. I made the case against inflation using mostly the unemployment rate, but the case becomes even stronger when you consider the job creation statistics. This unemployment is specifically being induced by a slowdown in job creation. Job creation is specifically what leads to inflation: it’s when companies want to hire aggressively that they start raising wages excessively and competition becomes unable to keep prices in check. If unemployment – which arguably has a more tenuous relationship to inflation – is far, far away from the danger point, job creation – which has a direct relationship to inflation – is even further away.

Quick reaction (I had hoped to say more about the decline in the rates of job creation and destruction, but that will have to wait, so your thoughts on this are welcome):

I think both monetary and fiscal policy can help with restructuring, as noted above monetary policy can increase the return on projects and thus creates an incentive to find "new, productive uses of resources." Fiscal policy can, both literally and figuratively, pave the way for those projects to come to fruition.

But, though fiscal policy in particular could have been devoted more toward helping labor and other resources make the transitions to new industries, and perhaps more could have been done to help with the creation of new opportunities, the main point I want to make is that we should distinguish between cyclical and structural unemployment. Much of the unemployment we are seeing is due to the business cycle, it has little to do with the need to restructure the economy, and both monetary and fiscal policy can be of great help with this problem. I don't know for sure how much of the change we are seeing is structural and how much is cyclical, but I am willing to assert that most of the change in unemployment is a cyclical rather than a structural phenomena. Thus, "even if I were to concede that monetary and fiscal policies don’t help speed up the adjustment process," though I see no reason to concede this, it only speaks to the ability of these policies to help with structural adjustment, monetary and fiscal policy are still very much needed to deal with the unemployment related to the business cycle.

This post has been republished from Mark Thoma's blog, Economist's View.

The Decelerating Rate of Bad News

According to the Bureau of Labor Statistics the unemployment rate dropped for the first time in a year which may mean we have stopped the bleeding, but it may take a long time for the economy to heal. James Picerno from The Capital Spectator discusses why the economic healing process has just begun.

Optimists will seize on today's news that the unemployment rate slipped last month for the first time in more than a year. Good news, to be sure, if only because it breaks the formerly nonstop rise in the monthly jobless rate. But the modest decline to a 9.4% unemployment rate in July from 9.5% masks the ongoing job destruction that roars beneath this otherwise encouraging exterior.



Nonfarm payrolls were lighter by a still hefty 247,000 last month, the U.S. Bureau of Labor Statistics reports. That's reassuring only by the dire standard of the far deeper monthly losses between September 2008 and June 2009. Relatively speaking, the labor market appears to be healing, or bleeding less profusely, to be precise. But equating this with good news is a bit like discovering that your boat has only nine leaking holes instead of 12. Your still taking on water, albeit at a slower rate, but the end result will be the same unless the trend changes: the boat sinks.

Indeed, virtually every corner of the labor market was taking on water last month, including the major sectors of goods producing industries (which lost 128,000 positions in July) and the all-important services sector (which shed 119,000 jobs last month). Perhaps we should keep the buckets handy for a bit longer.

Nonetheless, it's important to recognize that the slowing pace of job destruction isn't chopped liver. Ideally, the trend continues and later this year we'll reach zero job loss. We expect no less in the coming months, short of a spectacular turn for the worse in the economy, which at this point looks unlikely.

The monetary and fiscal stimulus engineered by Washington since the crisis began has been helpful in slowing the recessionary forces, and some of that progress can be seen in the chart above. For another take on the improving picture in the labor market—i.e., the decelerating rate of bad news—take a look at the trend in ongoing fall in new filings for jobless benefits, as we discussed yesterday. Other encouraging clues include signs that the housing market may be bottoming out, if it hasn't already. These and some other trends suggest that Q3 2009 GDP will be flat and perhaps even post a small gain, thereby giving more support to the idea that the technical end of the recession is near.

But as we've been emphasizing for some time, the technical end of the recession threatens to be far less satisfying this time in the business cycle. To be clear, a jobless recovery of some magnitude may be looming on the horizon, and it may roll on for longer than the crowd expects. Robust growth in the labor market is essential at this point, considering that a towering 6 million-plus jobs have been lost since this recession began in December 2007. Without a revival in the jobs creation, the expected rebound in the economy is less than assured as a solution to what currently harasses.

Perhaps we're being overly pessimistic, although for the moment there's some reason for at least reserving judgment about the breadth and endurance of the approaching "recovery." Consider, for instance, our second chart below, which compares initial jobless claims and continuing jobless claims on an apples-to-apples basis. The divergence between the two in recent months is clear, namely, the decline in initial jobless claims has yet to be matched by a commensurate fall in continuing claims. The implication: while job loss is slowing, the mass of the previously unemployed are not yet finding work.

Granted, continuing claims tend to lag initial jobless claims, and so we shouldn't rush to judgment. There's still time for continuing claims to decline without yet raising warning flags. But the hour is late. This is already the longest downturn since the Great Depression and the economy's still bleeding jobs at more than 200,000 a month. At this late stage, even moderate bleeding digs us deeper into a hole that's already quite deep, making it that much more difficult to escape. The only solution is an even stronger recovery in the labor market, which at this point is open to some debate.

So, yes, we're happy to see that the unemployment rate fell a bit. But from where we stand, that's virtually irrelevant. As we've been discussing for some time now, the big challenge is still ahead of us. Staving off a deeper economic contraction was essential, and arguably that job is complete. But now comes the far tougher task of rebuilding what was lost. Unfortunately, quick and easy solutions total exactly zero.

This post has been republished from James Picerno's blog, The Capital Spectator.

Productivity Increase Exceeds Expectations

You may not be very surprised that productivity rose, given the 5.7 million jobs lost since the recession began in December 2007, but it was still good to hear positive economic numbers. The American worker exceeded expectations but can this build momentum for economic recovery? Jason Simpkins from Money Morning discusses what the latest job numbers can mean for the economy.

Worker productivity rose in the first quarter, as companies cut costs by shedding workers and extracted more output from remaining employees. Analysts are hopeful that the increased efficiency will help slow rate of job cuts, which also appear to be easing from their formerly torrid pace.

Productivity, a measure of worker output by the hour, rose at a revised 1.6% annual rate in the first quarter, the U.S. Labor Department reported today (Thursday). That’s double the 0.8% estimated last month and a vast improvement over a 0.6% drop in the fourth quarter of 2008.

The gain in productivity was largely the result of job cuts and fewer hours worked by employees. U.S. employers have already shed 5.7 million jobs since the recession began in December 2007. Hours worked by employees plunged at a 9% annual rate in the first quarter, according to the Labor Department report.

The tighter payrolls and increased productivity led to a jump in corporate profits, which surged 3.4% in the first quarter from the previous three months - the first gain in almost two years. And now that businesses have found away to boost their productivity and widen their profit margins, analysts are hopeful that the labor market will stabilize.

“Businesses are far advanced in their objective of cutting jobs and controlling labor costs,” John Herrmann, chief economist at Herrmann Forecasting LLC, told Bloomberg News. “That suggests that the pace of job cuts should slow materially.”

A separate report from the Labor Department today showed fewer workers filed new claims for jobless benefits for the third straight week. Initial claims for unemployment benefits fell to 621,000 in the week ended May 30, a decrease of 4,000.

The data also showed that continuing claims - the number of people staying on benefit rolls - fell by 15,000 to 6.74 million in the week ended May 23, the first decline in 17 weeks.

Still, jobless claims remain historically high, as does the unemployment rate, which stood at 8.6% in April. U.S. Federal Reserve Chairman Ben S. Bernanke said earlier this week that unemployment is likely to increase, and a report tomorrow (Friday) may show that the unemployment rate climbed to a 25-year high of 9.2%, Bloomberg reported.

“The downshift in claims continues but progress is painfully slow and claims at their current level are still consistent with massive declines in payrolls,” Ian C. Shepherdson, chief U.S. economist of High Frequency Economics, told the AFP.

Shepherdson doesn’t expect jobless claims to reach the 450,000 level until next year.

“Feeble green shoots don’t stop companies laying off staff, still less actually [start] to hire again,” he said.

This post can also be viewed on moneymorning.com.