Ending the Job Destruction Is Just the Tip of the Iceberg

Friday's update on October's employment status is neither surprising nor encouraging. The U.S. economy is still bleeding jobs, but that's hardly shocking at this point. It's been clear for some time now that the risk of a jobless recovery is high.

Nonfarm payrolls shed another 190,000 positions last month, a modestly lower pace than September's 219,000 loss but still far away from anything suggesting stabilization in the labor force, much less growth.

Most of the job destruction came in the goods producing industries, although the services sector managed to shrink by 61,000 jobs in October. The conspicuous points of light were education and health services (a rise 45,000 jobs) and professional and business services (+18,000). But on balance, there's nothing to cheer in Friday's employment report other than to recognize that the pace of decline overall is considerably lower than it was during the height of the financial crisis late last year and in early 2009. Slim pickings after nearly two years of labor-market contraction.

The good news is that the magic level of zero job loss is coming, and perhaps soon. If we're lucky, it'll arrive before the year is out, although our guess at this point is that the first quarter of next year is a more likely forecast. Rest assured, stability in the labor market is near. Short of some new cataclysmic change in the current economic profile, the stars are aligned for an end to the job destruction that has been nonstop since January 2008.

Alas, the bigger problem is not ending the job destruction. Rather, the bigger challenge will be minting new jobs.

As of last month, the U.S. economy has lost 7.3 million jobs, or more than 5% of total nonfarm payrolls in December 2007, when the recession began. Given the hefty monetary and fiscal stimulus that's coursing the economy, job destruction can't go on for much longer without a dire change for the worse in the current conditions. We don't foresee such a change and neither do most economists. The positive pull of a rising GDP, as implied by the robust 3.5% annualized growth in the economy in Q3, will act as a brake on further job loss in 2010. Indeed, the natural tendency of the economy to right itself after the recent contraction, along with the liquidity injections from the government, will soon stem the loss in nonfarm payrolls. Thursday's fall in initial jobless claims suggests as much. New filings for unemployment benefits dropped to the lowest weekly level last week since January.

The great challenge is what comes after the arrival of zero change in the labor market. Turning it into something sustainably positive of some magnitude promises to be one of the biggest macroeconomic policy problems since the Great Depression. One of the dangers associated with this future is minimizing its potential for havoc, if not ignoring it altogether. As the job losses fade on a monthly basis and eventually reach zero and move into modestly positive territory, the crowd's initial reaction is likely to be one of celebration. That is likely to be premature.

Afterward, once reality sets in, the potential is high for ill-advised macroeconomic responses intent on fixing the problem. As the political establishment comes to grips with the future, the body politic will respond with its usual array of poor economic decisions. That penchant has been suppressed for much of the past generation, thanks to strong economic growth that expanded the U.S. labor market. But with a jobless recovery in the offing, and perhaps for some extended period, Washington's inclination to act, and in ways that may be less than economically productive, will grow stronger.

Meantime, corporate America is learning how to be more productive with fewer workers, which bodes ill for hiring, at least for the moment. Nonfarm business sector labor productivity increased at a 9.5% annual rate during the third quarter of 2009, the Bureau of Labor Statistics reported Thursday. This was the largest gain in productivity since the third quarter of 2003, when it rose 9.7%.

Creating jobs on a scale that Americans have come to expect in post-recession periods will prove difficult this time around. At the same time, the non-labor-market recovery will proceed apace, giving rise to what threatens to be the greatest divide between main street and Wall Street in decades if not in all of American economic history.

The biggest challenge, in short, is yet to come. Meantime, first things first: we're still waiting for the job destruction to end after 22 months.

Comments

[woollyB:]

"We don't foresee such a change and neither do most economists."

That's great. Most economists never foresee any trend change. They extrapolate the current trend and call it a forecast. They were 100% bullish in 1999 (the "new economy" and Dow 36,000), bearish in 2002, bullish in 2007, bearish in March ... and now, after a giant stock market rally and several months of "less bad" trends, they are again universally calling for imminent growth. Watch out!

Nov 06 12:58 PM

[Mad Hedge F...:]

cvh Ouch! Another 190,000 jobs went down the crapper in October, taking unemployment rate to a new 27 year high of 10.2%. Add in discouraged job seekers, and that puts the jobless rate at gut churning 17.5%, and over 20% in California. Along with yesterday’s stunning, gob smacking 9.5% increase in Q3 productivity, the figures point a giant arc spotlight on what is really happening in the economy. Companies are still firing workers en mass to boost profits. After getting blood from a stone they are returning to the same rock for one more drop. I guess if I fire myself, the profitability of my business would go through the roof too, and maybe even my stock would rise. At least then I would then be rid of my oldest, most expensive but least productive employee, who is the worst to get along with, max’s out his sick and vacation days, and wears the same clothes to work every day, even when there lipstick on the collar. But then who would write this daily letter? Maybe Cecelia, my cleaning lady, would do it. She’s cheap. This explains why when you go into Office Depot these days, there is only one minimum waged employee standing at the cash register, the hours on the phone I have to wait to get technical support from Dell, and the endless unmovable lines at Citibank. America’s service economy has become all about denying service to customers. The scary thing is, with companies firing their way to prosperity, what happens when we get another dip? My theory is that the US has entered an era of chronically high employment that is never going away, no matter what the government does. Goodbye USA, hello Germany!

Nov 06 01:31 PM

[Alphameister:]

I don't see the high-but-declining rate of job loss leading to stability followed by sustainable job growth. What "improvement" has been seen in employment indicators is surely linked to federal "stimulus" that must either expire in the next eighteen months or be renewed at further great cost to our grandchildren. Will state and local revenues recover enough to sustain jobs saved by this year's federal largesse to the states? Will construction jobs grow in the face of continuing massive home foreclosures and an excess of commercial space that won't be alleviated for a very long time? How will retail jobs fare in the inevitable further contraction of store space in the year ahead?

Nov 06 02:27 PM