Tuesday, December 09, 2008

The Almost Daily 2¢ - Employment at The Crossroads

With last Friday’s employment situation report it’s clear that we have reached a crucial point in the economic decline.

Although popularly reported as having provided unequivocal evidence that the current recessionary trend is more severe than recent periods of economic contraction (90s bust and dot-com bust) the report, more factually, indicates that we are instead at a crossroads.

The 533K non-farm jobs was quite large, far larger than most economists expected, but as a percentage of the overall employment level it was just on the high side, but still within the recent historic range (81 second dip recession, 90s bust, dot-com bust) of month-to-month declines that would typically be seen at the worst point in an recessionary contraction.

In fact, the “decline-to-date” total of all non-farm job losses as a percentage of the peak employment level set in December 2007 is almost certainly within recent typical patterns (see the chart below).

The following charts show the non-farm job loss on a year-over-year basis, month-to-month basis and running “decline-to-date” as a percent of the peak employment level for the current contraction, the "dot-com" contraction, the 90s contraction, the “second dip” 1981 contraction and the 1974-1975 contraction.

Additionally, as can be seen in the chart below, although jobless claims have experienced a particularly sharp run-up this year, adjusted for population, the trend has yet to look notably exceptional.

So, looking at the charts above you can see that we are still 1-3 months away from knowing definitively whether this decline will bring us firmly into uncharted territory (or not so recently charted) in terms of job losses, easily the most important factor going forward.

My sense though is that we are more than likely going to slide sequentially into one of the “worst” employment declines on record.

I say “one of the worst on record” because given the nature of the changes that our workforce has experienced over the many decades that there have been consistently tracked employment statistics, there is clear room for interpretation.

How bad the job market is determined to be may be more a judgment of its impact on households and not necessarily simply the level and duration of unemployment.

During the 1950s, 60s and 70s it appears that a manufacturing dominated workforce resulted in very sharp but short employment contractions which brought stunning month-over-month employment losses (sometimes close to 1% of the workforce in a single month… contrast that with Friday’s .39%) but which generally recovered quickly as workers retrained and transitioned to other manufacturing needs or simply repopulated the positions vacated by temporary layoffs (see chart below... click for larger version).

During the current period of supposed “Great Moderation” on the other hand, economic contractions had appeared to be “less frequent and less severe” although now it seems that that assumption is clearly in question.

Currently, 42% of all private non-farm jobs are in “Information”, “Financial Activities”, “Professional Business Services” and “Education and Health Services” of which all but education and health services are now experiencing significant declines.

Our labor is now far more specialized (jobs for the 42% reference above virtually all require a college degree) and with that specialization likely brings the unfortunate side effect of workers that can no longer easily retrain when economic conditions warrant change, and further, sets up the circumstances for significant career destruction and a prolonged period of depressed sentiment on the part of households.

Just as the decline in the housing market has brought a general decline in homeownership so too will the correction in the job market bring a fundamental decline to professional occupations.

Taken together, declining homeownership and widespread career destruction represents effectively a downward slide of many middle class families (middle upper, affluent upper) back to a more modest station.

This slide is not altogether new though.

The chart below shows the “total” unemployment rate which includes all “traditionally” unemployed and all “marginally” attached workers (read here for an explanation) which, having troughed in late 2000 prior to the dot-com bust, is now at its highest level since tracking began in 1994.

Also, in terms of job creation, the new millennium has already been essentially the worst period on record with 36.4% of the last eight years spent shedding jobs.

The following chart shows the ratio of months that reported non-farm job losses to total months for each decade since 1950.

The following chart shows the ratio of non-farm payrolls and private non-farm payrolls to the civilian non-institutional population (click for larger version) demonstrating that the most recent expansion failed significantly in bringing the overall employment level back up to trend growth before dropping yet again into serious contraction.

So, our current decline has greatly intensified a trend that has, more or less, been in place since early 2001 as an even higher percentage of households are forced down the socio-economic ladder.

The combination of wealth-destruction coming from falling home values and a second large stock market crash in less than ten years, debt-oppression (self inflicted) coming from large home, auto and consumer loans, and now a new and substantial decline in a job market that was already historically weak will likely produce the impetus for a sustained spiraling vicious cycle.

In fact, with the latest sales results coming from the auto and retail industries, it’s pretty obvious that the vicious cycle is already here and churning.