In Economic No Man's Land

The pundits are shocked, shocked to learn that jobs are still being lost. But there's really nothing surprising in today's jobs report for June, released this morning by the Bureau of Labor Statistics. Recessions have a habit of doing that, and for longer than the crowd expects. Disappointing and discouraging? Absolutely. Unfortunately, more of the same is probably coming.

Meantime, that doesn't change our view that the recession may be close to a technical end. But before we get into that point—again—let's look at how the latest nonfarm payrolls stack up.

As our chart below shows, last month's job loss was steeper than May's. Nonfarm payrolls were lighter in June by 467,000, quite a bit deeper than May's 322,000 decrease. The good news is that last month's decline is still a lot better than the worst monthly tumble so far in this recession—January's 741,000 slump.

click to enlarge

But let's not mince words here: job destruction remains potent. The month-after-month declines are adding up and the economy is sure to take a heavy blow as a result. At the top of the list of likely victims: consumer spending, as we've been discussing, including here.

In short, there's minimal hope for the moment that we're about to turn the corner and return to the glory days of 2007, when conspicuous consumption created a powerful tailwind for bull markets in just about everything.

Why, then, do we continue to talk about the technical end of the recession? In previous posts, we talked about why we're inclined to distinguish between a formal end to the recession but one without clear and obvious improvement on Main Street anytime soon—see our posts here and here, for instance. As we wrote back in mid-May,

The official end of the recession isn't likely to bring a material change in the discouraging economic news. The technical ends of recessions still bring plenty of pain for Joe Sixpack in the ensuing quarters. The fact that this recession is the deepest since the Great Depression suggests that the recovery period, whenever it commences, will be unusually slow and sluggish. And that's the optimistic outlook!

Today's jobs report certainly doesn't inspire us to change our view. At the same time, there's still reason to think that when the NBER gets around to dating the recession's end, it'll be sometime in the next several months. One reason for adopting that optimistic outlook is the weekly trend in new claims for jobless benefits. As we explained in March, the historical record for this data series suggests that new unemployment claims peak concurrently or slightly ahead of the NBER's terminal dates of recessions over the past 40 years.

On that point, today's update on jobless claims—for the week through June 27—report a total of 614,000. That's well below the peak so far of 674,000, set back for the week through March 28. In short, the trend in jobless claims is still signaling the recession's end in the foreseeable future.

To be sure, that's no guarantee. What's been true in the past isn't always true in the future. But there are other indicators—low interest rates, for instance—that, when considered in context with jobless claims, suggest that the technical finale to the recession may be near.

Even if that's true, there's still plenty of reason to remain humble on the near-term outlook for the economy. As today's employment report reminds, the labor market is still quite weak. That's not necessarily surprising, since employment is a lagging indicator and so positive net jobs growth tends to arrive late to newly minted cycles of growth. That tends to be true even in mild recessions; the fact that this is the deepest pullback since the Great Depression only emphasizes the point.

The bottom line is that while we continue to cautiously anticipate the end of the recession, we're still reluctant to predict the start of economic growth worthy of the name. The interim between the two—an economic no-man's land, if you will—threatens to run on for longer than usual in this cycle. Therein lies the main challenge that awaits, and it's only just begun.

Comments

[Mad Hedge F...:]

It's like we're trappend in an episode of "Lost". Ouch! The non-farm payroll came in at minus 467,000. What a spanking! The monthly figure is 100,000 worse than the expectations of most economists, and took the unemployment rate up to 9.5%. There are now 14.5 million unemployed, an all time high, 20 million underemployed, and who knows how many more who have taken pay cuts, unpaid vacations, and furloughs. Commodities got slammed across the board, stocks got trashed, and for a minute I thought they were going to run out of red arrows. Traders shorting the long bond got stopped out of their positions yet again. Looking at the data, it is clear that this is the worst case scenario. Even construction and government jobs, the beneficiaries of so much Federal largess, are still falling. Only employment in education and health care is still rising. This comes on top of yesterday’s disastrous figures showing sales at Chrysler fell 42%, Toyota (TM) 34.6%, General Motors (GMGMQ) 33.6%, and Honda (HMC) 29.5%. At least this will put that annoying “green shoots” crowd out to pasture. The Obama crowd has to be sweating bullets now, having fired their best shot at the enemy, with no apparent impact. Here comes the “L”. Please see my “Sell in May and Go Away” report at Ouch! The non-farm payroll came in at minus 467,000. What a spanking! The monthly figure is 100,000 worse than the expectations of most economists, and took the unemployment rate up to 9.5%. There are now 14.5 million unemployed, an all time high, 20 million underemployed, and who knows how many more who have taken pay cuts, unpaid vacations, and furloughs. Commodities got slammed across the board, stocks got trashed, and for a minute I thought they were going to run out of red arrows. Traders shorting the long bond got stopped out of their positions yet again. Looking at the data, it is clear that this is the worst case scenario. Even construction and government jobs, the beneficiaries of so much Federal largess, are still falling. Only employment in education and health care is still rising. This comes on top of yesterday’s disastrous figures showing sales at Chrysler fell 42%, Toyota (TM) 34.6%, General Motors (GMGMQ) 33.6%, and Honda (HMC) 29.5%. At least this will put that annoying “green shoots” crowd out to pasture. The Obama crowd has to be sweating bullets now, having fired their best shot at the enemy, with no apparent impact. Here comes the “L”. Please see my “Sell in May and Go Away” report at www.madhedgefundtrader.... .

Jul 02 01:42 PM

[Fighting Yoda:]

Unabated job losses (re)confirm that there are no Green Shoots anywhere. Stimulus has failed as expected – the problems are far larger and no appropriate solution is being targeted – socialism and Govt. spending are not the answers. We have to get back to basics – Save-> Invest-> Produce.

Green shoots were simply a PR hatchet job, market is up 30%+ anyway. Worry for all the gullible investors that would be slaughtered in the next market decline.

Jul 02 02:50 PM

[CautiousInv...:]

There is an interesting adverse feedback loop playing out between consumer savings and unemployment. The greater the savings, the greater the reduction in spending and the less need for employees.

Those that are unemployed spend less and stir fear within those that are employed..........leading to declines in consumption and further reductions in employment.

Let's say US GDP is around $14 trillion and consumer spending accounts for 71% of GDP...........and let's further assume savings goes from 0 to 10%.

After doing the math, you quickly see that this reduction in spending could easily reduce GDP by $994 billion and that is assuming a steady state in employment. With employment dropping, it would get worse.

To put this in perspective, the stimulus and reinvestment act is putting close to an extra $400 billion a year into the economy; the bucket is draining at twice the rate it is being filled.

Jul 02 03:07 PM

[MGA_1:]

If you track unemployement like they used to, the numbers are far worse - 16%. I wouldn't be surprised if the US hits 25% or more within a couple years. The gigantic credit bubble has popped....

Jul 02 03:44 PM

[JohnAl:]

This bust is a doozy because it's correcting one helluva boom.

The main problem now is that the government is doing everything in it's power to slow the correction. The bad decisions made during the boom need to be liquidated. Resources need to be reallocated. In a true market economy prices would now be falling, which would allow people to save more. As savings increased, interest rates would drop and new business opportunities would emerge. Employment would follow.

We're lucky some of this (greater savings, at least) is actually happening, given everything the government is doing wrong.

We no longer have a market economy. Government now determines resource allocation. The Fed determines interest rates and the money supply. The government is spending like there's no tomorrow and the Fed is making money free. But it doesn't matter. People still need to save - they need to get out from underwater. Except now it will take longer since prices aren't dropping as much as they should and as fast as they would were the Fed not inflating.

And since the government, not the market, is now in charge of resource allocation - who knows if the new economy, once one eventually emerges, will be sustainable?

Jul 02 04:07 PM

[RJMoran:]

What do we think the knock on affect of will be when 'unemployment benefits' end?! LESS spending. NO new saving (ya can't save what ya'll are not bringing in) People start eating their savings! Accelerated foreclosures. What have I missed?!

Jul 02 04:37 PM

[Jeff Nielson:]

The BLS's monthly jobs report has absolutely no connection with the real world. Weekly lay-offs (which have been 2.5 to 3 MILLION per month, all year) demonstrate there are at least 1.5 - 2 MILLION jobs being lost in the U.S. (net) each month.

There is no point in even discussing the fraudulent, "official" numbers.

Jul 02 04:43 PM

[yellowhoard:]

It's OK fellas!

Just three months ago, Obama declared that GDP would grow at 2.5% in the last half of this year.

So, no worries.

Jul 02 04:50 PM

[Larry House:]

James, if Bill Gross is right, growth, when we do finally get some, will be so weak we won't know or feel when the recession ends. The economy will be a zombie for many years. If Nassim Taleb is right, we are still in the middle of the crash--forget "end in sight"--we haven't yet plumbed the depths of the down turn, whether recession or depression.

Jul 02 04:53 PM

[Dirtnap:]

I'd say we're lining up for a couple of lost decades. We can thank government, finance industry, and of course the Fed, which forms the corrupt bridge between the state and corporate finance.

Right now we need to pray that we can promote inflation so that the average consumer (who still has a job, that is) can get a raise within the next couple years and actually improve their sentiment. While I don't believe in consumer sentiment as a fundamental, in this case I think it will prove to be very important.

Jul 02 05:06 PM

[mrxg4:]

Dear Mad Hedge Fund Trader,

Please stop pasting the same comment in every single macro article. Hell, you even did it twice on this one.

Jul 02 07:18 PM

[derryl:]

JohnAl wrote, "In a true market economy prices would now be falling, which would allow people to save more. As savings increased, interest rates would drop and new business opportunities would emerge. Employment would follow."

So true. The mechanism that brings prices down in recessions is bankruptcies and mass loan defaults. The country's debt load gets written down, banks that made too many big bad loans get liquidated, and all those assets the banks are holding on their balance sheets at bubble prices now come onto the market at recession prices.

But the United States of Goldman Sachs has decided to commit future generations of American incomes to making billionaires of every member of the banking cartel and keeping US asset values and debt volumes at utterly unpayable bubble levels.

In a free market these guys would be bankrupt and all the resources they control would be reallocated. Hell, us peons might even be able to afford to buy assets if all the insolvent Wall St banks were liquidated. But no, they get to hold onto the assets, backed up with your future taxes thanks to Hank Paulson and his crew.

There can be no recovery until debts are written down and assets become affordable. Converting debts from private hands to public hands just means you pay the debts as taxes rather than as principal and interest. YOU are subsidizing Wall St banks. If I was one of the thousands of prudent US bankers who didn't bet the farm on the bubble I would be really pissed off that my competition is getting bailed out with my money.

Jul 03 12:17 AM

[domjoel:]

oh no! a lot of individuals are being unemployed.
I have read a lot of news about this.

Jul 03 03:02 AM

[a. palmer jr.:]

The more the government toys with the economy the worse it's going to get. The solution is to keep their attention diverted with items like abortion, civil rights, when conception begins, etc. etc.

Jul 04 12:17 AM

[Dave Wrixon:]

You have hit it on the head. In a normal mild recession employment is a lagging indicator and does not have much impact on the course of the recession itself, but there is a threshold where the negative feedback becomes so strong that the unemployment becomes self-reinforcing and the cycle become very difficult to break. To some extent that is what stimulus is about, it is about avoiding reaching that point. However, in this case it would seem that we are well past that point, as the statistics seem to be under telling the story by quite a lot. Furthermore, when governments are creating the jobs in the way this one is, it tends to do more damage than good. Investing in countries with high government deficits is risky because the future tax burden is going rise dramatically. The weight of these concerns may well outweigh the benefits of stimulus. And it all too easy to blame things on Obama. Whilst I am pretty sure he is doing all the wrong things the situation was frankly so out of control by the time he got the reins it is doubtful whether any actions he adopted would have had a good outcome. However, in this case it seems it a bit like swerving to avoid an on coming trunk and ending up driving off a cliff.


On Jul 02 03:07 PM CautiousInvestor wrote:

> There is an interesting adverse feedback loop playing out between
> consumer savings and unemployment. The greater the savings, the greater
> the reduction in spending and the less need for employees.
>
> Those that are unemployed spend less and stir fear within those that
> are employed..........leading to declines in consumption and further
> reductions in employment.
>
> Let's say US GDP is around $14 trillion and consumer spending accounts
> for 71% of GDP...........and let's further assume savings goes from
> 0 to 10%.
>
> After doing the math, you quickly see that this reduction in spending
> could easily reduce GDP by $994 billion and that is assuming a steady
> state in employment. With employment dropping, it would get worse.
>
>
> To put this in perspective, the stimulus and reinvestment act is
> putting close to an extra $400 billion a year into the economy; the
> bucket is draining at twice the rate it is being filled.

Jul 04 01:46 PM

[Lightway:]

Most of the stimulus money hasn't even worked its way through the system yet.


On Jul 02 02:50 PM Fighting Yoda wrote:

> Unabated job losses (re)confirm that there are no Green Shoots anywhere.
> Stimulus has failed as expected – the problems are far larger and
> no appropriate solution is being targeted – socialism and Govt. spending
> are not the answers. We have to get back to basics – Save-> Invest->
> Produce.
>
> Green shoots were simply a PR hatchet job, market is up 30%+ anyway.
> Worry for all the gullible investors that would be slaughtered in
> the next market decline.

Jul 04 05:43 PM

[Dan in mpls:]

Dave Wrixon write above that Obama is doing everything wrong but that things were so messed up that he could not likely have done anthing to avoid what is happening today. I beg to differ. It had to have been clear to anyone listening during the campaign that he intended to vastly grow the size of government. McCain had promised to balance the budget. Does anyone believe that he would have persued the stimulus bill Obama did? Can anyone seeMcCain having allowed the printing presses to run wild? Obviously neither could have brought tis economy back from the dead quickly. The private sector is losing jobs at a fast clip yet the government sector is adding them and at high wages paid for by the rest of us.

Had Obamas jobs program put a 15 dollar an hour cap on wages there might have been a slowdown in jobs loss ala WPA. Had he CUT the minumum wage that was just increased at the height of the last bubble by a few bucks - which know would increase employment, he would have created private sector jobs overnight. Had he promised to cut government saleries by 5 or 10 percent and to bring them in line with non goverment, non union wages, we might be looking at some progress there. I know we as a nation are not yet ready to acccept that kind of change but I think that thats the kind of pain that we need to see before things get better and none of this will happen under Obamas reign. I just sold off may entire IRA last week.

Jul 05 08:52 AM

[drpaul1139:]

The President of the USA could end unemployment tomorrow with an Executive Order!
Finally a permanent employment and consumption solution
Paul Katchings
All Rights Reserved July 2, 2009

A new flexible labor policy means dropping the mandated workweek to ‘0’ hours and then builds the model from the ground up.

For example a 15% reduction in the mandated 8-hour workday to 6.8 hours produces an instant -2% employment rate in the US instantly absorbing the 11,159,999 unemployed and creating a labor shortage of 3.22 million labor units.

The President of the USA could end unemployment tomorrow with an Executive Order.

More consumption will result from this new flexible labor policy but not necessarily to previous levels, and not by debt driven demand consumption as part of the two-prong solution.

This flexible labor policy example instantly solves the 100% employment problem.

Next we need three pieces of data to solve the debt driven consumption problem for the USA and the globe.

The three pieces of data are the population of the USA, the gross domestic product number, and the value of the US stock market.

To continue reading go here: www.productequityvalue...

Jul 05 09:49 AM

[Moon Kil Woong:]

As more govrernment spending works it's way through the system this quarter on lower jobs and wages we get to see what a growing government jobs led recovery really looks like. Since not much in the way of goods and services are being produced, I would not say it looks good for Treasury bond rates or low inflation.

A third stimulus would probably carry us over 15% of the economy being government spending. When do we start ringing the alarm bells?

Jul 13 06:06 PM