Friday's Employment Data: Has the US Entered a Recession?

While the latest GDP figures suggest an economy that continues to grow, Friday's employment data are more consistent with the claim that the U.S. economy has entered a recession.

The Bureau of Labor Statistics reported on Friday that the seasonally adjusted number of workers on nonfarm payrolls fell by 51,000 in July. Their separate survey of households put the decrease in employment at 72,000. Earlier this week, ADP reported a tepid 9,000 gain in private-sector employment.

Though the monthly employment figures contain considerable measurement error and are prone to revision, a clearer picture emerges from the year-over-year percentage change, which is now negative. We've never seen a year-over-year decline in nonfarm payrolls without an economic recession.

Source: FRED.

The BLS also reported that the unemployment rate increased 0.2 percentage points to 5.7%. A spike up in the unemployment rate is another defining characteristic of an economic recession.

Source: FRED.

These numbers are not necessarily inconsistent with Thursday's GDP report. Okun's Law is an economic regularity noted by Arthur Okun in the 1960s that has held up reasonably well in the decades since. It asserts that for if GDP grows 2-3 percent slower than trend for one year, the unemployment rate would rise by 1%. Real GDP growth over the last 4 quarters has been 1.8%, compared with an average annual growth rate of 3.4%. The unemployment rate has increased over the last year from 4.7% to 5.7%. Thus slow GDP growth alone, rather than an outright fall in real GDP, would be consistent with the rising unemployment rate.

I've argued previously that the question of whether we've entered an economic recession is a materially important one, and I still believe this to be the case. But after last week's numbers, I'm also sympathetic to the position of Fed Chair Ben Bernanke:

Whether it's a technical recession or not is not all that relevant," Mr. Bernanke said. "It's clearly the case that for a variety of reasons families are facing hardship."

Comments

[investor88:]

Insightful comments which leans to the view [together with other articles like that in Seeking Alpha "Is the banking system safe?"] that the US economy is going through a period of hardship the duration of which is anyone's guess. For traders and investors, this view ought to carry weight in decision making.

2008 Aug 03 08:17 AM

[Umm, yeah:]

Garbage in, garbage out. How can you reasonably look at measurements across decades when you've changed the way you're measuring GDP (and inflation) now versus how GDP (and inflation) in previous decades. The gov't is cooking the books, and the discrepancies in the numbers show that.

2008 Aug 07 11:05 AM