Another monthly employment update, another dismal report. So it goes in a vicious recession. The only question: When will it end?
We take a stab at some perspective below, but first let's recap Friday morning's ugly numbers. Last month suffered another sharp fall in nonfarm payrolls, the U.S. Bureau of Labor Statistics reports. The economy lost 651,000 jobs in February — the 14th consecutive month of payroll declines and the third month of losses above the 600,000 mark. In this year's first two months alone the economy has already shed nearly 1% of total nonfarm payrolls. Unfortunately, the outlook for March doesn’t look good either.
That brings us to the burning question: When will this nightmare end? We don't have the answer, nor does anyone else. That said, a fair reading of the economic data, including a review of past recessions through history, suggests that the bleeding will go on for some time. That's just a guess, of course. Can we do better than simply guessing?
Perhaps. One small effort on that front comes by considering the trend in initial jobless claims, which is a leading indicator of sorts in that it previews the state of the economy in the immediate future. If more workers file for jobless benefits today, the ranks of the unemployed next month will reflect the fact in official jobless tallies.
Looking to the trend in initial jobless claims offers some perspective on how the cycle is unfolding and where we are in the current cycle. Let's start by looking at the four-week moving average of weekly jobless claims from 1967 through yesterday's update, which shows that weekly claims fell substantially to 631,000 for the week ended February 28, 2009. That's a step in the right direction, but anything over 600,000 clearly suggests the recession fires are still burning hot.
But looking at jobless claims numbers alone can be misleading because the size of the labor pool changes through time. Generally, nonfarm payrolls expand, even if recent experience tells us otherwise. Nonetheless, over the long haul, the labor force increases, at least it has over the long stretch of history in the U.S. As such, we need to look at jobless claims in context with current nonfarm payrolls through time, as we do in the next chart.
Putting jobless claims into perspective with the overall level of nonfarm payrolls suggests that initial jobless claims will peak before the recession end, or at least peak as the recession ends. That's potentially valuable information if you consider that the official notice that the recession has ended won't be coming for many months after the fact. That leaves us to look for other indicators in real time, and initial jobless claims are on the short list.
In the past six recessions, the four-week moving average of weekly jobless claims as a percentage of current nonfarm payrolls peaked either in the month the recession formally ended (as per NBER) or the month directly ahead of the recession's formal end. By this measure, in just one case since 1969 did the jobless claims peak arrive much earlier: the 1969-70 recession ended in November 1970; the jobless claims peak came in May 1970.
Where does that leave us currently? The latest bar on the far right-hand side in the chart above is simply the latest batch of numbers. The four-week moving average of initial jobless claims through February 28, 2009 represents 0.48% of last month's total nonfarm payrolls. History suggests that we have a ways to go before the employment pain ends. That forecast is based on the following: The high point for the past 40 years is 0.75% in 1982 — well above the current 0.48%. Adjusting for the fact that this is likely to be the worst recession since the Great Depression implies that we might go to well above 0.75% this time.
In short, there's more pain to come, or so we expect. We're probably beyond the halfway point in this process, although there's still too much uncertainty to say for sure. Perhaps we'll see some concrete evidence, one way or the other, in the coming months. But for the moment, the economy continues to bleed and there's not much reason to expect an imminent end to the pain. The recession, in short, roars on.