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Help Wanted: Slumping Employment Is Best Indicator This Is Recession

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By CAROLINE BAUM

Bloomberg News

Published: July 10, 2008

The U.S. economy has been leaking jobs for six straight months, seven if government hiring is excluded.

Granted, it has been a slow leak in terms of the length of time and magnitude of the losses (an average of 73,000 jobs a month), but there's nothing to suggest an imminent about-face in the labor-market trend.
Initial jobless claims breached the 400,000 mark last week, a level consistent with the onset of past recessions.

The Conference Board's Employment Trends Index, an aggregate of eight leading labor market indicators, continued its yearlong descent in June, pointing "to an even sharper deterioration in the labor market in the months ahead," according to the board.

Taken in conjunction with the decline to 43.8 in the Institute for Supply Management's nonmanufacturing employment index, the lowest in its 11-year history, it's hard to be optimistic about employment prospects.

"Labor demand is shrinking, with both the help-wanted index and the net hiring of temporary workers hitting new lows in recent months," said Ian Shepherdson, chief economist at High Frequency Economics in Valhalla, N.Y.

Shepherdson thinks it's only a matter of time until the payroll numbers catch up with labor-market reality.

Then again, reality as we know it could be revised.

The Bureau of Labor Statistics uses something called the birth-death model to estimate new business information that isn't captured in the monthly survey of existing establishments. The model "isn't cyclically adjusted," said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. "That will bias upward nonfarm payrolls when the economy is slowing."

Just this week, the National Federation of Independent Business reported that its small-business optimism index fell to a record low in June, a "recession level reading," according to the survey.

"It's highly unlikely we are seeing new businesses formed, and it's highly likely we are seeing old businesses expiring," Kasriel said.

In the past year, for example, the birth-death model estimated an increase in construction jobs (not seasonally adjusted) in every month except November, December and January, and in finance in all months except January. How likely is it that these two battered sectors are seeing lots of startups?

"In the 12 months ended in June, total nonfarm payroll fell an unadjusted 167,000," Kasriel said. "Without the birth-death adjustment, the decline was larger than 1 million."

Why all the focus on employment? It's one of four coincident indicators the National Bureau of Economic Research's Business Cycle Dating Committee looks at when determining the months in which the economy peaks and bottoms out. Yet employment has always been first among equals.

"The broadest monthly indicator is employment in the entire economy." Those are the committee's own words.

It's easy to see why. Employment is more than a job. It's a means of support - in most cases, the only one - and provides a sense of psychological well-being.

News about a decline in employment and a rise in the unemployment rate affects the national psyche in a way that the other three - industrial production, real personal income less transfer payments, and real manufacturing and trade sales - don't. Every time employment has declined for four consecutive months or more in the last 60 years, the U.S. economy was in recession or emerging from one. I doubt this time will be different.

Think about our state of affairs. Consumers are trapped between sky-high energy and food prices and increasingly delinquent interest payments on home, auto and credit card loans. Businesses are caught between weak domestic demand and slowing growth in the world's major economies. Financial institutions are clamping down on credit availability, even in the face of cheap credit from the Federal Reserve. Stung by massive losses and write-downs on subprime mortgages, banks are under pressure to raise capital and atone for the errors of their lax-lending ways.

With no prospect for a near-term turnaround in the labor market, the real question becomes: At what point do the employment declines gain the critical mass to warrant the official recession designation?

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