Pandemic job losses: when should we begin a see a real improvement back towards “full employment”?

Let’s take a deeper look at where employment stands as we begin to see the end of the pandemic in sight.

As I and many others noted last Friday, although with the exception of one month there have been job gains every month starting last May, at the pace of the last few months it would take 2 years or more just to get back to the level of employment just before the pandemic struck.

But breaking down those losses between aggregate hours and aggregate payrolls is illuminating. Here’s a look at the YoY% change in jobs, hours, and payrolls for the last 3 recessions and recoveries:

The employment report shows signs of an improved employment situation, but on balance it looks like more of the same. The unemployment rate fell 0.2 points to 8.5%. This continues the recent trend of a falling unemployment rate. But the drop was also driven by anther 50,000 drop in the
labor force.

But the increase in the headline payroll employment was 200,000, one of the largest gains this cycle. The household increase in employment eased to some 176,000, significantly smaller than over the past few months when the household survey showed well over 200,000 monthly job
gains.

In particular, private payrolls showed a nice improvement over the past few months.

Maybe most importantly, the index of aggregate hours worked looks like it is continuing the trend
established soon after it bottomed. The year over year gain in hours worked has been bouncing around 2.5% since the first quarter.

Average hourly earnings continue to stagnate around 2%, modestly better than the 1.8% increase in 2010.

It may be possible to say that average weekly earnings growth has bottomed, but to call it a bottom or a trend change look like a stretch to me. With such weak wage gains nominal personal income growth is likely to remain weak and in an environment of such weak income gains it is difficult to see how higher inflation can be sustained.

The employment report continues to report a sluggish economy and employment growth. The payroll report showed a gain of 120,000 jobs in November, consisting of a 140,000 gain in private payrolls and a 20,000 drop in government employment.

The household survey months showed the stronger gains it has in recent with a gain of some 278,000 jobs. With this 278,000 gain the unemployment rate fell -0.4% from 9.0% to 8.6%. The jobs gain alone was not enough to generate a 0.4% drop in the unemployment rate as the participation rate also fell-0.2%. On a monthly basis this is a very noisy indicator and when you look at the last few months data the participation rate actually appears to be bottoming– just the opposite conclusion that the headline suggest.
Moreover, employment as a percent of the population actually rose last month, reinforcing the point that this one months drop in the participation rate is noise, not a trend. November is the month when part time employment for the Christmas season starts and this can cause data problems.

The work week for all employees was unchanged at 33.4 hours while the average workweek for
nonsupervisory workers fell from 33.7 to 33.6 hours. As a consequence the index of aggregate hours worked for nonsupervisory workers fell -0.1%. Over all this does not appear to be a trend change and could very well be revised away.

Although the index of hours worked is still far below its pre-recession peak, compared to gains in other jobless recoveries it is showing nice gains.

Average hourly earnings for all employees fell from $23.20 to $23.18 while for nonsupervisory employees it rose from$19.53 to $19.54. Overall average hourly wage growth continues to slow and still is threatening to hit a new all time low.

Moreover, average weekly wages are also stagnating and the recent strength in consumer spending stems more from a falling savings rate rather than a surge in income.
Sorry to be so slow to post this mornings, but the BLS web site was overwhelmed this morning and it took a long time to download the data.

If you are an investor the good news is that productivity growth improved sharply. Unit labor cost fell in the third quarter and the spread between pricing and labor cost widened nicely. This implies that earnings growth is accelerating and that my earlier fears that earnings expectations were too high is no longer a problem.

The bad news is that with strong productivity, hours worked and income growth weakened. In the third quarter, nominal personal income expanded at under a 1% annual rate, a sharp slowing from the roughly 5% growth over the past year. Moreover, average hourly earnings growth continues to slow. Now at 1.56%, it is approaching an all time record low.

The recent improvement in consumer spending did not stem from improved real incomes. Rather it was financed by a drawing down of savings. While the headlines are dominated by Europe’s problems and the market is reacting strongly to these headlines, SEER continues to believe that the biggest market-economic threat is the extremely weak income growth.

With such weak income growth, it will be difficult for the consumer to sustain the stronger consumption growth of recent months. Yet increased personal consumption expenditures accounted for 1.72 % of the 2.5% growth in third quarter real GDP. This is especially true if the lower social security tax is not renewed for 2012 and/or if oil prices continue to rebound. SEER’s real retail sales model implies that real retail sales growth should be approaching zero.

Capacity utilization at 77.4 seems to indicate that manufacturing has significant excess capacity. But over time, capacity utilization has trended down and it is now at the long term trend line. This implies that maybe the economy does not have as much slack as generally believed.

Interestingly, while everyone seems to be worried about the impact of Europe’s problems on US financial institutions, quality spreads actually improved last month. This implies that at least the bond market is not expecting too severe an impact.

The employment report showed little evidence that the trends of the past year have changed.
Over the past three months private payroll employment grew some 72,000, 191,000 and 104,000
while government employment fell 132,000, 33,000 and 24,000.
The one encouraging signs was the third strong month of employment growth reported in the household survey. Over the last three month it has shown gains of 331,000, 398,000 and 277,000.
After slowing earlier this year the growth of employment reported by the household survey is
reaccelerating. Because the household survey often leads the payroll survey this is a significant trend change to watch.

The average weekly hours was unchanged at 33.4 so the index of aggregrate hours worked only increased 0.1% as compared to a 0.5% gain last month and a -0.2% drop in the previous month.
But overall the trend of modest gains in hours worked has not changed.

Average hourly earnings growth continued to moderate and wage growth is approaching the record low of late 2003. It looks like the slowdown is accelerating, not reversing.

With the small change in the workweek the slowing of average hourly earnings means that average weekly earnings growth is also slowing. While the European situation earns the headlines and the market is reacting strongly to those headlines it still looks to me like the major risk to the economy and the markets is weak income growth. The third quarter improvement in consumer spending and the economy stemmed from consumers drawing down savings and taking on debt as the savings rate fell significantly.

The September employment report was among the strongest this cycle. Private payroll employment rose 137,000 and despite the 34,000 drop in government employment total
payroll employment rose 103,000. Moreover, the household survey showed a gain of 398,000.
Even so, by historic norms employment continues to be weak. But compared to the other jobless recoveries this cycle continues to show growth somewhere between the 1990s and 2000s cycles.

Because the household survey tends to lead the payroll numbers the large gains in the household survey was encouraging.

Wage growth continues to show weak gains.

I have a wage equations that I’ve used for may years and it is no longer calling for falling wage. Earnings did not fall as the equation suggested immediately after the recession. Because of sticky wages I was not surprised by this . But now I expect wage growth to remain weak to offset the period when average hourly earnings were stronger than the wage equation called for. The equation makes wages gains a function of the unemployment rate, capacity utilization and inflation expectations using the three year trailing CPI as a measure of inflation expectations.

The average work week lengthened and together with the weak wage gains average weekly earnings rose 0.6%, one of the largest gains this cycle. I had been particularly worried about the lack of income growth and saw it as a major threat to economic growth. As of last month real weekly earnings were down some 2.27% over the past years. With weak oil prices real weekly wages should show a nice gain in September.

Sorry, there seems to be a problem at BLS and I have not yet been able to download the data as of 9:15.

After yesterday in the stock market we needed some good news and compared to reduced expectations the employment report provided it. Private payrolls rose by 117,000 a level
much better than the last two months data. Even though the previous months data was revised higher, on a smoothed basis the employment gains remain anemic.

Except for the early 2000’s cycle, this still remains the weakest cycle on record as far as job creation is concerned.

The unemployment rate ticked back down. However, this was due largely to a 193,000 drop in the labor force as the household survey reported that employment actually fell 38,000. This was the third decline in the last four months. So the household survey reported a drop in the number of unemployed , but that was only because the labor force contracted.

Typically the household survey tends to lead the payroll data and from that perspective the very weak job gains in the household survey is discouraging. The year over year gain for the household survey is only 0.2% as compared to 1.7% for the payroll data. Historically the payroll data has always had problems capturing jobs in small and start-up firms. So they use the birth-death model to adjust for this and one can not help but wonder how much of the reported gain in payroll jobs is due to this adjustment.

The average work week was unchanged. So together with the significant gain in payroll jobs the index of aggregate hours worked increased 0.2% after being unchanged in June.

The one item of good news in the report was a 0.4% jump in average hourly earnings. The year over year gain in hourly wages rose to 2.3% from the 2% gain in the previous month.

But with the workweek unchanged the gain in weekly earnings remained at 2.6%. I have been arguing all year that with wage growth so weak that higher inflation was not sustainable. Consumers are now trying to reliquify and are no longer willing to use their credit cards to offset weak real earnings. Consequently, when as we have seen in the first half of the year inflation tried to accelerate it will lead to economic weakness, not a self reinforcing inflationary cycle.

That is what we are seeing in the economy and markets. With oil prices down sharply and other commodity prices showing significant weakness we should see real income growth rebound in the second half.
2.6

Will those who are claiming that the economy is recovering and things are better please explain why, as of today, we have sixteen straight weeks of “seasonally adjusted” UI claims above 400,000?

I’m now convinced that there will be no troop reductions in Afghanistan, Iraq, Libya, or any of the other places where we’re conducting unpaid-for, possibly illegal, wars between now and late 2012 if only because those soldiers would come home and raise the unemployment rate.

The employment was bad news as payroll employment only rose by 18,000 as compared to the last months disappointing rise of 25,000. Government employment fell 39,000 versus 48,000 in
May. Private payrolls expanded only 57,000 that was even weaker than the prior months 73,000. Over the last two months payroll employment was essentially unchanged.

Moreover, the household survey reported an employment drop of -445,000. This lead to the unemployment rate rising to 9.2%


Historically the household survey tend to lead the payroll survey and the very poor performance of the household survey is extremely discouraging.

In addition the average workweek was unchanged so aggregate hours worked only expanded 0.1%

Over the last few months the index of hour worked has been:
………March……… April……… May…….. June
………100.5……… 100.7…….. 100.7 ….. 100.8
You would never know it from listening to the talking heads, but this recovery is actually stronger than the last recovery.

Average hourly earnings fell from $19.42 to $19.41. Both the year over year and compound three month growth rate of average hourly earnings is only 1.9%. Wage growth is approaching a record low.

Average wekly earnings growth also continues to slow. The year over gain is 2.5% and the three month growth rate is only 1.8%. Actually, with oil prices falling real weekly earnings ticked up month before last, the only gain in seven months. But this month average weekly earnings actually fell from $652.51 to $652.18 so unless we are experiencing deflation real wages will fall again this month. Given this weakness in wages and earnings it is extremely difficult to see where growth is going to come from.

The employment report was the strongest this cycle as total payroll employment expanded some 216,000. This consisted of a 230,000 gain in private payrolls and a 14,000 drop in government jobs as state and local governments are still shedding jobs. Moreover, the household survey reported a 291,000 gain in employment. The last two months private employment gains have been the strongest this cycle, exceeding the 229,000 gain in April 2010. Last months gains now appears to be the start of a new stronger trend rather than
just an offset to the weak numbers in January.

The unemployment rate fell 0.1 percentage points to 8.8%. Earlier this year it looked like signs of a stronger economy was showing up almost everywhere but the employment data.

Now the employment data is joining the other data pointing to a stronger economy. We need to remember that employment is considered to be a lagging indicator.

The improvement was also reflected in stronger hours worked as the index of aggregate hours worked rose 0.6% — the largest monthly gain this cycle.

But average hourly earnings were unchanged at $22.87 and the annual growth rate continues to slow.

The combination of expanding hours and very weak wage gains generated an increase in average weekly earnings. But the year over year increase in average weekly earnings is only
2.87% this month versus 2.98% in February. With weekly earnings only growing at under a 3% rate it is hard to see how firms can pass higher commodity prices through to consumers.
The inflation hawks seem to be ignoring the point that higher prices or inflation is most likely to generate weak consumption, not sustained higher inflation. Managers and analysts appear to be far too optimistic about firms ability to raise prices.

P.S. Go Kentucky!!!!