We Could Soon See 1 Million Jobs Lost in Single Month

When it comes to the over and under on unemployment, I'll take the over. As I conveyed in January when I discussed some of the implications of a shrinking global economy, I believe it is a foregone conclusion that the rate of unemployment will climb towards 10% this year, but I am sticking to my suggestion that it actually hits 11-12%. In terms of job loss, this implies that we will lose a total of 5-6mm jobs, or an average of about 500K per month. Given that this process should be front-loaded to a great degree, we run the risk of a record monthly decline of 1mm jobs. The forecast for January is for a decline of 500K. I have no clue if it will be this month or next, but I don't think the market or our collective confidence are prepared for a headline like that.

A few caveats:

• I am not an economist. I have no fancy models, but I have been following the data closely now for 23 years
• The data is subject to revisions and new benchmarking and has substantial statistical margins of error

I see several factors suggesting a watershed event like a 1mm monthly job loss.

• Pent-up Supply of Pink Slips
• The Small Business Effect
• The Cycling of the Numbers
• Historical Precedent

I had a thesis last year that proved correct initially but that ultimately failed as the economy went over the cliff. Looking back at the very tough times companies had finding qualified labor after they drastically cut payrolls following 9/11, I had expected that they would be very reticent to lay off during this downturn. This proved to be the case until the fall. While it's not especially clear in the chart below (click to enlarge) over the past 50 years, it wasn't until September that we had a monthly decline in excess of 127K. The declines in the first 8 months of the year, well into the official "recession" that has now been dated, were, in fact, stunningly low.

Of course, the floodgates opened late in the year, and we have been running at a torrid pace now for what will be the 5th consecutive month. I believe that we are seeing a proverbial throwing in of the towel by large companies who are in the process of evaluating the new economic environment and abandoning their desire to carry their workforce through the downturn.

When we read the papers or listen to the news, it is quite evident that large companies are laying off workers en masse. A more subtle trend to detect is what the even larger overall employment providers, small and medium sized businesses, are doing. I have encountered several anecdotal signs of a rapid retrenchment, and it makes sense. As smaller companies see pressure on sales and margins, the owner is able to manage costs by working harder. Additionally, spouses, family or friends who become unemployed or underemployed can help pick up the slack as the owner cuts the payroll. Shrinking credit availability isn't helping make it any easier for these smaller businesses to hang onto employees.

As I mentioned above, I expect to see a total job loss of about 6mm this year, which equates to 500k per month or a continuation of the trend of the past 3 months as well as the expectation for this month. I assume that a lot of this will be front-loaded and expect that at least half of the losses will occur in the first 4 months of the year, suggesting that the average will be 750k per month through April. If the economists forecasting "just" 500k hit it right this month, that suggests the average over the next three months would be about 850K. Clearly, we could hit 1mm in one of those months. While we are hearing of the massive layoff announcements, it is hard to predict when they actually hit. It would seem that the biggest headline risk would be in February.

My final basis for being open-minded regarding the potential for a month of 1mm jobs lost is looking at it as a percentage of the base rather than an absolute number. In the chart above, we had an increase of 1.1mm jobs in September, 1983. The largest decreases over the past 50 years have been 602K in December, 1974 and the recent 584K in November. If, however, one looks at the data as a percentage of the base of employed non-farm workers, it is clear that there is precedent for a higher number. There have been two instances of gains in excess of 1%, while there have been several instances of losses of .5% or more. If one takes the current base of 135mm and assumes a 0.8% decline (like the worst print in 1974), we would see a loss of almost 1.1mm jobs. (click on chart below to enlarge)

The rapidly deteriorating employment situation is so powerful that it will be creating a negative feedback loop that will adversely impact the overall economy. Many of our safety net programs are funded via payroll taxes (Social Security, Medicare) or through corporate payments to state governments (unemployment insurance). Income taxes will also be impacted. At the same time that government income is threatened, demand for services will be escalating. As you can see in the chart below (click to enlarge), the duration of unemployment has been increasingly longer and for more extended periods for quite some time, and we are risking leaving a large segment of our population as permanently unemployable. The statistics cover up another ugly truth: Many folks are underemployed. We are beginning to see downward pressure on wages as well, and clearly the workweek is shrinking. Clearly, consumption will be pressured for quite some time as unemployment rises and incomes stagnate due to either wages falling or fewer hours worked.

The government can do very little to change the trends now firmly in place. In the long run, it is crucial that we retrain those workers who no longer are able to work using the skills that they have acquired, but this takes a long time. While it makes little sense to keep people on the job when the job isn't economically justifiable, it seems like many of the job losses in the coming year will be from viable companies just scaling back for an extremely weak economy. It may make sense for the government to promote job retention by subsidizing it. An easy way to do this would be to eliminate employer contributions to SS and Medicare, which would effectively lower the marginal cost of keeping employees. Similarly, the government might consider subsidizing unemployment insurance and worker's compensation insurance that is paid by employers to the states. These programs would effectively pay for themselves to the extent that they reduced the loss of payroll (employee contribution) and income taxes and served to improve corporate cashflows.

While I could be wrong about actually getting a print of 1mm jobs lost in a single month, I think that the odds are pretty strong. This economy is the worst since the 30s, and the data indicates that the monthly employment change can drop by as much as 0.8% in a given single month. The more important issue is to understand that the deferral of layoffs last year will result in a continued near-term assault on the workforce. The economic implications are extremely negative. Until the market begins to better understand that unemployment will move into the double-digits, stocks are most likely not properly discounting the risks to even lower earnings.

Disclosure: None

Comments

[Moon Kil Woong:]

I cringe at the thought of an official unemployment rate of 10% (unofficially it is probably already there). That will feed a unstoppable negative feedback loop for several quarters despite any stimulus plan. Still, I feel you are probably correct.

Employment loss will feed the downturn. Trying to save the housing market will no longer help because it has become an income/employment issue which is much harder to solve than asset erosion.

Thanks for the article Alan Brochstein. I also have been saying for some time January employment numbers will be horrible.

Feb 02 02:27 AM

[Tradememe:]

The employment rate as a good lagging indicator is showing the effects of the last quarter of 2008. Will it create a vicious circle ? Unlikely. For this is not the the first or last recession that the world or the US is going through.

Feb 02 02:53 AM

[dawase@gmai...:]

Constructe -

I would argue actually that the housing debacle has largely been the result of the "employment/wage issue". Wage growth has been stagnant for a very long time here while the cost of living has escalated dramatically. The only possible way to live was through increasing amounts of leverage, ie. the Option ARM + the HELOC.

The fundamental problem we face is, at its core, an employment issue. Fix the employment market in the US and the housing market will fix itself eventually. Propping up banks and home prices doesn't do anything when affordability is the problem.

Feb 02 02:54 AM

[headlocal:]

Alan -
Your article is probably prescient, but over the last two years we have been running ~2.4M jobs lost monthly...these have been offset by ~2.5M new jobs, according to the BLS's quarterly "Business Employment Dynamics Summary", which come out with about 8-month lags.

In the two most recent reports, 4Q07 and 1Q08, 7.4M jobs were lost each quarter; these were offset by 7.7M new ones in 4Q07, and 7.1M in 1Q08.

To my astonishment, it seems the unemployment rate number that gets so much attention is really the small difference between two far larger numbers, and this has several points of impact:

a) in a credit-starved downbeat economy, it is hard to imagine who wants to continue creating enough new jobs to balance the "normal" rate of job losses;
b) 7.4M jobs lost quarterly = ~29.6M jobs lost annually, or one sixth of all the jobs in the economy...while some of these were doubtless due to attrition, probably 20M involved an involuntary termination, and unless the victims were recluses and hermits, probably 50% of the working populace must have a close personal connection with one of these terminations, so the political implications of 50% or more of the workforce seeing friends and acquaintances scrambling for work are clear;
c) these numbers are as-of 3/08...job creation is not booming, and unless the ~30M new jobs created in '07 are closely replicated, even Obama's 2.5M new jobs is a small drop in a large bucket.

Your projection of a 6M job loss is, from a labor-dynamic perspective, a projection that some sectors will create a total of ~23M new jobs, assuming that the 29.5M loss rate does not increase. Both numbers may include mild optimism, but I hope to be show to be unduly pessimistic.

1Q08 data available at:
www.bls.gov/news.relea...

Feb 02 04:53 AM

[Jack K:]

A lot of job creation over the past number of years was actually secondary to excess government spending. Government spending, via the multiplier effect adds to economic stimulation and jobs. But they are not really sustainable and I think that the lack of this increase is showing up. If government had no deficit this year, that would be where the economy would be by itself. The Author thinks that government could help employment by decreasing taxes on each employee. Of course. Expand on that. What is really limiting job creation? Too much money drained by government at all levels. Fear of lawsuits if you don't hire the right person. Or pay them the the same. Etc., etc.. It seems so obvious that government can't help the employment issue. Both federal and state. They create obstacles to hiring workers, and then complain about unemployment.

Feb 02 05:51 AM

[Alan Brochs...:]

Thanks for that insightful comment. I think that what you are describing is what one would call normal turnover. In tough times, though, normal turnover falls. Sure, people still die, but fewer people leave their jobs voluntarily or succeed in finding new employment opportunities to permit them to quit their former jobs.


On Feb 02 04:53 AM headlocal wrote:

> Alan -
> Your article is probably prescient, but over the last two years we
> have been running ~2.4M jobs lost monthly...these have been offset
> by ~2.5M new jobs, according to the BLS's quarterly "Business Employment
> Dynamics Summary", which come out with about 8-month lags.
>
> In the two most recent reports, 4Q07 and 1Q08, 7.4M jobs were lost
> each quarter; these were offset by 7.7M new ones in 4Q07, and 7.1M
> in 1Q08.
>
> To my astonishment, it seems the unemployment rate number that gets
> so much attention is really the small difference between two far
> larger numbers, and this has several points of impact:
>
> a) in a credit-starved downbeat economy, it is hard to imagine who
> wants to continue creating enough new jobs to balance the "normal"
> rate of job losses;
> b) 7.4M jobs lost quarterly = ~29.6M jobs lost annually, or one sixth
> of all the jobs in the economy...while some of these were doubtless
> due to attrition, probably 20M involved an involuntary termination,
> and unless the victims were recluses and hermits, probably 50% of
> the working populace must have a close personal connection with one
> of these terminations, so the political implications of 50% or more
> of the workforce seeing friends and acquaintances scrambling for
> work are clear;
> c) these numbers are as-of 3/08...job creation is not booming, and
> unless the ~30M new jobs created in '07 are closely replicated, even
> Obama's 2.5M new jobs is a small drop in a large bucket.
>
> Your projection of a 6M job loss is, from a labor-dynamic perspective,
> a projection that some sectors will create a total of ~23M new jobs,
> assuming that the 29.5M loss rate does not increase. Both numbers
> may include mild optimism, but I hope to be show to be unduly pessimistic.
>
>
> 1Q08 data available at:
> www.bls.gov/news.relea...
>

Feb 02 06:14 AM

[Alan Brochs...:]

You are 100% correct that there are many barriers to keeping people employed, including regulatory ones. The point I was trying to make about a holiday for payroll taxes (by employers) is only a tool for helping in the short-run. I sure believe it is more effective than sending people checks (whether they need them or not, such as last year) or building bridges (is that really going to help all of these laid off salespeople?). When jobs are lost, the costs to society go up and our tax revenues go down. I think I said that we should never do anything to preserve a job that is uneconomic, but much of what goes on in a recession (this is actually a depression) is a move that extends beyond sustainable. Cutting employer payroll contributions on a temporary basis would seemingly be prudent fiscal policy in an attempt to break what appears to be an inevitable downward spiral in employment.


On Feb 02 05:51 AM Jack K wrote:

> A lot of job creation over the past number of years was actually
> secondary to excess government spending. Government spending, via
> the multiplier effect adds to economic stimulation and jobs. But
> they are not really sustainable and I think that the lack of this
> increase is showing up. If government had no deficit this year, that
> would be where the economy would be by itself. The Author thinks
> that government could help employment by decreasing taxes on each
> employee. Of course. Expand on that. What is really limiting job
> creation? Too much money drained by government at all levels. Fear
> of lawsuits if you don't hire the right person. Or pay them the the
> same. Etc., etc.. It seems so obvious that government can't help
> the employment issue. Both federal and state. They create obstacles
> to hiring workers, and then complain about unemployment.

Feb 02 06:19 AM

[tdillian:]

thanks for the article... I am convinced that the unemployment rate is defnitely much higher than 7.2% that is being reported.
I would also like to add that its not just consumer confidence, but consumer trust in their governemnt that is gone.

I mean, if all the tax evaders like Geighter, Daschle paid all their taxes, perhaps we wouldn't need a stimulus!

but on a seriously note, I really believe that it is not just confidence but trust that has eroded away..

Feb 02 07:15 AM

[Alan Brochs...:]

Indeed, employment is a lagging issue - expect it to be falling for quite some time. The time to buy stocks will be at a point when it is still falling but one can see the turn 6-12 months out. I hope that is later this year, but we are in uncharted waters in my opinion. While you are correct that what is going on today is a function of what happened after the summer (and the slow realization that the economy hit a hard landing and not a soft one), there are too many negative feedback loops that were triggered. Pretty soon, state and local governments will have to start laying off, as will not-for-profits. Funding (taxes and contributions) is at risk. We are a service society, and the demand for all types of services will be falling. Look at the BLS data and see what people do and think about if we really need 10mm people in sales when no one is buying. Even if they don't lose their jobs, their incomes will be hammered. I could go on to things like the implications of VCs getting shut down, etc. I am normally considered optimistic (and early), I am not some "chicken little". That's what really scares me!


On Feb 02 02:53 AM Tradememe wrote:

> The employment rate as a good lagging indicator is showing the effects
> of the last quarter of 2008. Will it create a vicious circle ? Unlikely.
> For this is not the the first or last recession that the world or
> the US is going through.

Feb 02 07:17 AM

[Matt Miller:]

Let's keep in mind that like most of government, these numbers are "fixed" just like the inflation number. Those on "extended benefits" and those dropped from the list (as not seeking work) are NOT listed. The real unemployment number is about 10.8% NOW. and will hit 15-17% as compared to the honest number during the great depression of 22-25%.

It is possible that we are entering a period worse than the great depression which may look like child's play.

Thank you Bush, Greenspan, stupid consumers and greedy banks-credit card companies.

Feb 02 07:52 AM

[Mark Goldes:]

An alternative economic analysis leads to the need for A Human Investment Tax Credit Program.

A few of the incentives were tried in the Jobs Tax Credit which generated more jobs in less time than any previous legislation in our history.

The 2009 Program can be downloaded without charge at: aesopinstitute.com

Credit obviouslyy also needs to be available, but this may result from the present stimulus ideas.

Feb 02 09:34 AM

[kelm:]

A very good article - thanks. I agree that we will exceed 10%. I sense a "denial" effect amongst most commentators who do not want to go there yet. Unfortunately we will probably not have long to wait. Certainly the overseas news is apparently degrading rapidly. Bloomberg reported this morning that 20 million Chinese migrant workers were now unemployed.

What no one has yet addressed is when the unemployment level in this country causes people to take to the streets. Europe has seen protests in Latvia, Lithuania, Russia, Britain, and 2.5 million in France. Let's remember it is winter in all those countries just as it is here. taking to the streets in winter takes a lot more commitment than on a hot August night. America has been oddly quiet but that quiet will last only so long. Much of what is included in the stimulus package is really support for people and not stimulus in any economic sense. I keep wondering if this is a recognition in Washington that support is needed to stave off protest.

Feb 02 11:04 AM

[Dave Wrixon:]

Ain't going to happen. They will not tell you it is that bad unless it is a hell of a lot worse. And perhaps they are right not to for now. Who knows?

What I can tell you is things are already worse and are going to stay worse than they will admit to for the foreseeable future.

However, we are being told this about confidence. Well, in the short-term that may be true. But fundamentally, it is about getting realigned with the new reality, which is going to be impossible if you keep lying to yourselves.

The bottom line is that countries like China and India are working their butts off to keep us in the style to which we have become accustomed. But why would they do that? Well, clearly it is a means to an end, but there is going to be a payback and it will occur at a time and on terms of their choosing.

What we need to be doing is working out a strategy by which we can compete. All I am getting on here is that the US workers are the most productive in the World. If that were ever true, and I have to say I am skeptical because the figures can be presented so many different way, it was only ever so because the American worker had the backing of the World's financial institutions behind them. That is no longer true. Most US banks can hardly prop up their own overheads, let alone act as white knights for the rest of the country.

China is investing far more in its productive future and because of the low value of the Yuan the real scale of what is really going down is difficult to grasp. One dollar of sunken investment in China is worth far far more than one dollar of investment in the US. Which is why just about nobody has been investing in America for a while. The lack of investment in turn is and has severely undermined the famous US productivity.

To turn this around and attract new investment, the US needs to work harder, it needs to work smarter and it needs to save it earnings and reinvest them to re-establish its competitive edge. But before it can even start it, needs a smarter, fitter, better educated and better motivated workforce that are targeted efficiently at World markets by management that knows what it is doing.

Can they do it? Yes, probably. Can they do it before 2020?
No, not even if they start right now.

When will they start?
Well, it will probably take a decade of bickering before they resolve their differences.

Is the Obama stimulus helpful?
Yes, without it the entire economy will implode.

Will it solve the problem?
No, it is simply like giving a cardiac arrest patient a shot of adrenalin. It may save his life, but it is certainly not a cure.

Feb 02 11:41 AM

[Frank In Texas:]

You are dead center on target. We have lived in a house of cards for decades. Years ago in Oklahoma I told my friend Bill that the housing market was due for a major bust some day as wages could not keep up with housing costs. I forecasted a worker bust, and that many families will have to live in communes or even tribes to survive. Laugh if you want but the writing is on the wall. The Book of Revalations in the Bible tells of what is the US in effect going belly up finanacially in the last days. Folks this is serious and it will get much worse. The printing presses can print all the money the White House calls for, but if foreign investors do not buy that debt, then you may need to think about how you will survive.

Feb 02 08:31 PM

[beenburnedt...:]

Can I come live with you in Texas?


On Feb 02 08:31 PM Frank In Texas wrote:

> You are dead center on target. We have lived in a house of cards
> for decades. Years ago in Oklahoma I told my friend Bill that the
> housing market was due for a major bust some day as wages could not
> keep up with housing costs. I forecasted a worker bust, and that
> many families will have to live in communes or even tribes to survive.
> Laugh if you want but the writing is on the wall. The Book of Revalations
> in the Bible tells of what is the US in effect going belly up finanacially
> in the last days. Folks this is serious and it will get much worse.
> The printing presses can print all the money the White House calls
> for, but if foreign investors do not buy that debt, then you may
> need to think about how you will survive.

Feb 02 11:34 PM

[stealstella:]

Looking at the headline, i'll get very nervous. Continuing of job losses can be the worst scenario. I doubt that the crisis will be over till next year. I'm in the business of helping people find jobs and right now, people do need help at this crucial period. No obligation to anything or whatsoever. But please feel free to take a look at my website. jobstaxi.com
just thought of sharing this info.

Feb 03 09:30 PM