Thursday, November 13, 2008

Employment Looking Worse...But It's Actually A Good Thing

From Bloomberg:

First-time claims for U.S. unemployment insurance rose last week to the highest level since September 2001, when the economy was last in a recession, as weakening demand led companies to fire more workers.

Initial jobless claims increased by 32,000 to a larger- than-forecast 516,000 in the week ended Nov. 8, from a revised 484,000 the prior week, the Labor Department said today in Washington. The total number of people on benefit rolls jumped to the highest level since 1983.

Restrictive credit and slumping demand are causing companies to retrench by trimming payrolls and investment. Rising joblessness will further squeeze consumer spending, which accounts for more than two-thirds of the economy, and threaten a protracted downturn, economists said.

``The labor market is only reinforcing a very pessimistic picture,'' Linda Barrington, a labor economist at the Conference Board, said in a Bloomberg Television interview. ``When you start to see the downward pressure on wages as well as the credit crunch, that's only going to make consumers much more nervous.''

This means unemployment won't be getting better anytime soon.

However in a perverse way this is actually good news. Before you throw the heavy object in your hand at the screen let me explain that last comment.

I think the recession started in the 1Q of 2008, although I have seen other argue it was the 4Q of 2007. Either way we've been in it for at least 10 months and maybe more. But we're clearly not out of the recession yet. In fact, it appears the problems are accelerating. That means this won't be a short recession like the 2001 recession which lasted 9 months. Instead, this slowdown will last at least 18 months and probably more.

Now looking at the last expansion we see a terrible record of job creation. The best reading of total jobs created is 7.2 million. I think some of the reason for this slow rate of job growth is companies have become more and more reluctant to hire new people, instead preferring to increase productivity to the nth degree. As a result, now when a company does hire somebody it's a big and important investment. On the flip side of that observation, it also means that companies are more reluctant to let people off because each new employee is now more important; they're a bigger piece of the company's overall productivity picture.

Also remember that employment is a lagging economic indicator. It is one of the last indicators to start increasing during an expansion and one of the last to start dropping in a recession.

So - when we see an increase in job losses last months it means several things.

1.) The second phase of the contraction is beginning. That means we're closer to the end.

2.) We've already lost 1.2 million jobs this year, or 16% of all the jobs created in the last expansion. Job losses accelerated in the last three months, totaling 651,000. That means we lost 9% of all jobs created during this expansion in the last three months. While there is no upward limit on what can be lost, I seriously doubt we'll loose the entire 7.2 million.

What all of this means is I think there is only so far we can go in terms of job losses. Let's assume a really bad scenario and assume that we'll lose 40% of the jobs created or 2.8 million. Because we've already lost 1.2 million we've got 1.6 million to go. Assuming a 250,000/month pace that means we've got about 6-7 months left of serious job losses.

I should add (and I should do this more often) I could be seriously wrong in my thinking here.