Beveridge Curve Balancing Act: April 2010

Looking deeper at today’s Job Openings and Labor Turnover report you can see that while the unemployment rate is showing notable initial signs of establishing a peak, the job openings rate is showing an equal but opposite troughing dynamic.

Further, the latest data indicates that job hires are occurring at a rate of 3.7% of total employment while total job separations are occurring at a lessor rate of 3.4%.

So, currently hires are outpacing separations thus resulting in, more or less, a healthier job market and more evidence that the unemployment rate may be in the midst of a sustained topping.

It's important to note that today's data is very preliminary and volatile and that a more sustained and larger spread between the rate of hires and separations would be required to make a significant dent in our current structurally weak job market.

Beyond Deterioration?

As I have pointed out in past posts, the ratio of total non-farm payrolls to the civilian non-institutional population serves as a very accurate general indicator of macroeconomic contraction and expansion.

Looking at the chart (click for dynamic version) you can see that peaks and troughs in this series correlate very well with the NBERs determinations of the beginning and ending of past recessions while the peak year-over-year decline has always occurred just after the end of recessionary contraction.

Looking at the latest trend in this series it’s plain to see that we are likely beyond (at least in a technical sense) the latest recession which this indicator suggests ended sometime between Q2 and Q3 2009.

If future macro trends were to follow along even roughly what has been experienced in the past, then we should be coming into some form of sustained workforce recovery.

On the other hand, it’s important to note that while the 2000s “expansion” was sustained (trough of late 2003 to peak of 2007), it was so weak as to constitute an almost entirely futile trend in the midst of a far larger and fiercely negative downward slide that started in 2000.

With the severe and worsening bout of long term unemployment, the question now is, are we on the cusp of a meaningful workforce recovery OR are we simply going to see more evidence of a structural deterioration of the labor market?

Economic Jolt: Job Openings and Labor Turnover July 2008

Yesterday, the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 18.23%, job “hires” declined 15.53%, and “separations” declined 3.24% led by a 10.66% drop in “quits”.

These results are clearly indicating that the slowdown in the employment market has developed substantially over the last six months and now is quickly accelerating down into territory typical of recessionary contraction.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for five consecutive months strongly suggesting that the private sector is planning to curtail future hiring activity.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with December’s results posting the eighth straight decline on a year-over-year basis further confirming the recent weakness seen in the job market.

Job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), are also declining primarily due to the inclusion of “quitting” activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with the sharpest decline on a year-over-year basis seen since August of 2003.

The Almost Daily 2¢ - Backdropping the Backdrop

In anticipation of Friday’s release of the latest read on the employment situation, this post, along with the next several daily posts, will attempt to present a progression of analysis seeking to shed more light on issues surrounding the present state and future prospects of the job market.

First, to get a sense of what’s at stake here, envision some of the key problematic elements that we know to exist in our economy today, namely nationally declining property values, upwardly resetting mortgage interest rates and a nearly complete absence of commercial lending all working together to trap a large cohort of homeowners, especially from 2000-2006 vintages, in an unprecedented state of financial stress resulting in a significant loss in confidence, a material pullback in consumption, and soaring rates of foreclosure activity.

If there was ever a time when a down-shift in employment could spontaneously spark the self-reinforcing tinder of a widespread recessionary conflagration, this must be it.

But as we all must doubtlessly “know” or, at least, have been made repeatedly aware by the traditional media, all this current turmoil had, until now, come amidst the “backdrop” of a strong labor market.

Yet, considering the less-than-fundamental circumstances that drove the expansion of the housing boom, the labor market weakening as a result of the housing bust and not the other way round should come as no surprise.

The financial engineering that brought forth a bounty of no-money-down, no-doc, low-doc, neg-am, sub-prime toxic ARM, HELOC, teaser rate and cheap jumbo loans was a nationwide phenomenon and as such, infected all property markets with equal inflationary ferocity.

Now, post-collapse, these very same markets and, more importantly, their participants, are left to navigate their way through the aftermath resulting in, in all likelihood, a continued shortfall in demand for luxury, discretionary and even non-discretionary comforts as the remaining borrowers that are prepared to service their debt obligations hunker down.

This hunkering down, be it forced or of one’s own volition, is the essential element driving an unwinding of the consumption machine that, when taken full course, will likely dictate a significant restructuring of the business of both producers and service providers.

So, three interesting aspects of our labor market that warrant some investigation in order to better understand current and future outlook are as follows:

1.) What, to date, has been the direct impact of the housing decline on the labor market including fallout from construction, real estate services, building materials, home furnishings, home services and retail?

2.) What might be the extent of job losses related to corporate restructuring in preparation for and as a result of a prolonged recession?

3.) Can the recent expansion of net exports serve to buoy the economy, drive job creation and offset the effects of a protracted domestic slowdown?

In upcoming posts, Ill attempt to provide some data that may help to provide a basis for drawing some conclusions for these basic questions but for now, let’s look at the current breakdown (click for larger charts) of both the total labor force given by the BLS household survey data and non-farm payrolls given by the BLS establishment data.

As you can see, the US is truly a service economy and that fact will likely play an important role in any forthcoming restructuring.