Labor Pains: Deeper Contractions

The labor market continues bleeding, as today's update on the nation's payrolls for July reminds.

Compared with past recessions -- and, yes, we're in one -- the current ills look mild, as our chart below suggests. What worries us is that the pain, however modest, may roll on for longer than usual.

Is a "mild" recession that lasts longer than usual better, or less painful, than a deeper contraction that ends quickly? Only time will tell, although our suspicion is that in the grand scheme of economics, deeper and quicker is probably the better choice, although that depends heavily on how deep deep is.

In any case, no one has a choice and we're all fated to play the recession cards we're dealt. What's more, there's plenty of pain in the employment numbers these days, comparisons to the past notwithstanding. For the eighth month running, nonfarm payrolls contracted. Adding to the pain is the rise in the unemployment rate last month to 6.1%, the highest since 2003.

True, August's loss of 84,000 jobs in the economy was fairly middling, although that's cold comfort for those who are out of work. But in the search for a silver lining in today's employment news on a macro level, that's as good as it gets for the moment.

The question, then, is how long does the job destruction roll on? To repeat our standard mantra, no one knows. But there are clues, and currently they're not encouraging. As we pointed out yesterday, initial claims for new unemployment benefits look inclined to rise. The implication: Future employment reports will stay negative for the foreseeable future.

One result is that the Fed is likely to shy away from an interest rate hike any time soon. But even that traditionally bullish news has lost its power to inspire. Meanwhile, there's still the question of whether inflation is set to fade. If not, we're in for even greater challenges.

In short, there are still many risks bubbling in the economic and financial spheres. Defense is still the only game in town.

Comments

[gabe borens...:]

We are not in recession which is defined as two consecutive quarterly GDP declines.It is the fact ,that many investors /economists and the portfolio managers use the term recession quite frequently.The stock market prices have adjusted accordingly .The latest GDP data defies the definition of the recession.While many may argue that the GDP was primarily driven by the exports ,that is irrelevant issue as exports create economic growth and jobs.Yes the U.S has finally became mean, lean economic exporting machine.
The unemployment data appears to be distorted and more importantly it is a lagging indicator.It reflects the past not the future.
We continue to deal with an investment psychosis which ignores major improvement is some key data and continues to amplify and distort less impressive indicators.
The U.S economy is consolidating and on the way to a major rebound.
Investment psychosis and the market volatility will continue while longer.To quote one President ,"make no mistake about it"-we are heading for unpredented rebound which will be amplified by record inflows into dollar and a dollar denominated assets.

2008 Sep 05 12:31 PM

[Anwar Bhamla:]

Gabe: If it quacks like a recession..It IS a recession. You sound like a very well read person, you should know that all govt. statistics especially in an electionyear are suspect.

I hope-wish you are right. However the headwinds seem to be too strong. If China stopd reinvesting their dollars in the US, if housing prices do not recover, If financial companies do not find a way to recover their losses, we are all sunk.

To all readers: Be defensive, very defensive.

2008 Sep 05 12:55 PM

[Jackson Cash:]

Gabe, when you find yourself in a hole, just keep on drill, drill, drilling!

I'm sure you're right- tens of millions of increasingly broke, indebted, aging, unemployed, angry people, off balance sheet risk dumping, large-cap institutional "evaporation", sleeping superpower aggressiveness, and not to mention years of statistical trending are all "lagging" and "distorted" indicators of the past -- all signs of things to get better - particularly when revisions are counted.

Easy money either way.

2008 Sep 05 01:20 PM

[Jason Rines...:]

I agree Wyosteven. Main Street always drags down Wall St. Main Street was running blood in the streets by February. But many are encapuslated and forget that no Main St, no Wall St. -20 total cumulative GDP is what we are in for by 2012. This will shed all the excess capacity from a 25 year supercredit bubble. The nasty bankers at the top whom assisted this mess along to have more indoor tennis courts will be flushed, along with many unsavory House Reps in Washington. I fully expect a massive voter revolution in 2012. Until then, we can all just 'hope for change'. I am voting Ron Paul.

2008 Sep 05 06:21 PM

[whidbey:]

What you seem to miss in this post is the fact that unemployment leads to a nasty change in P/E - down. The value of equities will fall substantially, and bonds will go wild on the up side. But what matters is how do we fix this stand off? There is no agreement on the options. Certainly not Fed action. Maybe inaction to allow consumers to do bankruptcies , and we let houses fall until they somehow look like bargains. Now, what is needed is loanable funds to buy houses with. It just does not work with what we know at this point. A fall in equities means big liquidity infusions will be needed. That means stagflation for about a decade.

2008 Sep 05 07:20 PM

[Steven Hansen:]

Gabe - gdp is negative if you back out inflation. gdp has not had a negative period since the 60's so i guess we have had no recession since then. employment is the first real concrete leading economic indicator. it has an economic multiplying effect. the other leading indicators are simply smoke and mirrors.

2008 Sep 06 09:55 PM