The Labor Market Has Not Yet Signaled a Turning Point in the Markets

The rate of decline in employment moderated substantially in May, according to the BLS figures released June 5, to about half the monthly rate of job loss recorded over the preceding six months (345,000 vs. 642,000). The news was received in a variety of ways.

First, the cynics. They tend to wax sarcastic at the idea of “things are not getting worse quite as fast as they were” as a good-news proposition. But a wide variety of recent data indicate that the economy is no longer in the state of free-fall that it entered last September, and this is indeed good news. To begin to level off is the first step toward the start of the recovery.

Second, the academics note (correctly) that there is little information in each individual monthly statistical fluctuation that is measured, because the data are inevitably noisy. Still, the public wants to know, in real time, what is the best we can glean from the information we have.

Third, the financial press, in particular, had been asking whether this quarter could turn out to be the bottom of the recession. The May employment report encouraged speculation that the answer was “yes.” The stock market reacted positively.

The members of the NBER Business Cycle Dating Committee (of which I am one) will be responsible for calling the trough when the time is right. We have a range of views regarding the proper place of employment numbers in such deliberations. But all of us agree, on the one hand, that a decline in economic activity is a decline in economic activity, and therefore still a state of recession, even if the rate of decline has moderated a lot. But I believe that we also agree, on the other hand, that employment is usually a lagging indicator of economic activity. (For example, the economy continued to lose jobs long after the ends of the 1991 and 2001 recessions. Hence the “jobless recoveries.”)

Speaking entirely for myself, I like to look at the rate of change of total hours worked in the economy. Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker. The length of the workweek tends to respond at turning points faster than does the number of jobs. When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off. Conversely, when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers. (The hours worked measure improved in April 1991 and November 2001 which on other grounds were eventually declared to mark the ends of their respective recessions.) The phenomenon is called “labor hoarding” and it is attributable to the costs of finding, hiring and training new workers and the costs in terms of severance pay and morale when firing workers.

Unfortunately, as reported by Forbes, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all. The length of the average work week fell to its lowest since 1964! The graph below shows that not only did total hours worked decline in May, but the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September. Hours worked suggests that the hope-inspiring May moderation in the job loss series may have been a monthly aberration. If firms were really gearing up to start hiring workers once again, why would they now be cutting back as strongly as ever on the hours that they ask their existing employees to work? My bottom line: the labor market does not quite yet suggest that the economy has hit bottom.

Comments

[David Van K...:]

Excellent article! I like your description about the relationship between hours worked and the jobs data. Makes perfect sense the way you explained it.

I take it that SA editors changed your proposed headline. Your article is about the economy, not "the markets." They tend to do that sometimes, unfortunately, and end up missing the thrust of the article.

Jun 09 08:10 AM

[andydee:]

Are you aware of what the critics (not just skeptics) of that May Employment Report are claiming?

Chris Martenson is a critic, and his views were outlined in a June 5th blog..."May Employment Report Not Believable"
www.chrismartenson.com...

He outlines his reasons for concluding the report is bogus, based mainly on two points the positive surprises in the report occurred chiefly in categories that are "modeled", not counted - and he disputes the veracity of the model, and secondly, the hard-to-believe gov't employment numbers, a drop of only 7,000 during a period of severe contraction in States' employments and the ending of 60,000 census takers jobs.

Your "punchline" - " The graph below shows that not only did total hours worked decline in May, but the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September." seems to support his thesis.

Perhaps we should be paying more attention to the (non-political) ADP report on employment than to the "official" (and political?) BLS reports henceforth.

Jun 09 09:58 AM

[Stone Fox C...:]

Good info. Any ideas on how the June/July hours worked numbers will look like? Don't employers first quit laying off workers, then expand hours worked by existing employees, then hire new employees. If so, it seems like we've hit the first step where the rate of layoffs is down substantially. Also, since alot of people are now suggesting that the recession ends in Q3 this would fit perfectly with another couple of months of declines in hours worked followed by a turn in August.

Jun 09 05:42 PM

[ciel:]

Professor, I have long had a few questions that I have not yet found very satisfying answers for, which are perhaps very related to the current recession, and definitely related to your entry. If at all possible, could you shed some light on them in either a reply, or subsequent post:

First, I am perplexed and troubled by the recent trend of declaring recessions over long before the job market turns. Specifically, I understand how the unemployment rate has almost always behaved as a lagging indicator... but I'm not talking U3.. I'm talking about what you have just touched on: "Total Hours Worked" --

Despite a respite in late 2001, this series relapsed, and continued to *contract* until finally reaching a *trough* in mid-2003. If GDP can really be guestimated to be total hours worked +/- productivity, even if productivity was higher than god during the early oughts, it sort of seems reasonable to conclude that GDP may have been overstated from 2002 to 2003... or, at the very least, GDP overstated the health of the real economy during that time.

Heck, taking that out to the next thought: MEW seems to have whitewashed the years after 2001, regardless. From 2001 through 2006, it seems the US, and indeed much of the world, was living on hallucinated wealth, courtesy of Bank of Bubble House ATM, et. al.

Recently some work I am sure you are familiar with has been done that suggests productivity wasn't even as high as originally thought over the course of this past decade. If that is true, might we see benchmark reductions to GDP that throw one or more quarters during that rather anemic 2002-2003 period into negative territory?

Bringing me to my second question: What exactly was it that prompted NBER to adjust the official date of the 73-75 recession, and exactly what was that adjustment?

Bringing me to a third question, really: Would a bigger-than-noise downgrade to GDP during the 2002-03 time frame prompt the BCDC to take another look at start-stop dates of the previous recession?

I recall it was Martin Feldstein who wrote that there's no such thing as a 'jobless' recovery' ... and for most people, this rings entirely true, regardless of what the stock market is or is not doing, regardless of whether or not a companies earnings are on the mend, regardless of whether or not another bank is saved by the FDIC. All those other things, they almost always pale in comparison to whether or not people are still working fewer jobs and/or total hours....

Jun 10 07:19 PM

[Bob Powell:]

Seriously now. Why not look directly at Job Losers (U-2) for "insight" on whether the job market has signaled a turning point? U-2 is "Job losers and persons who completed temporary jobs, as a percent of the civilian labor force." It does not.

The Job Losers (U-2) measure has soared, jumping to 6.2% in May (it was 4.2% in Dec08, & 3.0% in Jul08) ... accelerating upward at an astonishing rate.

See the graph toward the bottom at www.exponentialimprove... or go to the BLS site: www.bls.gov/webapps/le....

Jun 13 12:08 PM