In the past few weeks I have been alarmed about the growing debate about deficits and taxes, so much so that I have moved to a double dip baseline from one of a multi-year recovery. I find it in total disregard of past economic history that we are moving in this direction so quickly.
So, as I marvelled at the wonderful news that unemployment is dipping, I had these disturbing downside scenarios in the back of my head. However, having just looked back at my recent posts on the monthly employment situation report, I can write this post free of that recessionary bias. Below, I will give you a read of these numbers, how they relate to what I have said previously and what I think it means going forward.
The move down to 10.0% and the enormous upside surprise in non-farm payrolls is definitely better than I expected as I said in the links. The worst of this particular downturn is behind us and we are definitely in recovery mode. The question now should not be about how many jobs we lose but rather how we can accelerate upside and induce more hiring to bring down what seems to be a structurally-high level of unemployment.
Here’s what the household survey had to say:
- The number of employed persons increased by a seasonally-adjusted 227,000 in November (but only 44,000 on an unadjusted basis). That’s pretty significant.
- Looking at unadjusted numbers to remove seasonal biases, I see that employment has increased due to seasonal hiring for two months in a row. We’re only talking about 53,000 jobs but that is significant. More significant are the year-on-year changes. The downward move in the number of employed persons change peaked last month at 6.4 million. This month, it was 5.4 million. The same huge drop is evident in the seasonally-adjusted (SA) numbers as well. But, the drop is greater in the unadjusted (NSA) numbers (740,000 SA versus 978,000 NSA). Translation: seasonal adjustments are overstating employment losses on the household survey.
- The same pattern of job loss overstatement is evident in the year-on-year change in the number of unemployed as well. (580,000 SA drop versus 686,000 NSA drop). If I make year on year comparisons, they should about the same whether or not I use seasonal adjustments since there is no seasonality in year-on-year comparisons.
- The labor force participation rate continues to dive. It was 65.0% SA and 64.9% NSA. The fact that it is still dipping should tell you that, despite the foregoing two bullet points, we are still losing jobs, causing people to fall out of the labor force.
The establishment survey was not as bullish as the household survey but the numbers were very good. Non-farm payrolls barely declined (-11,000) and this was not due to the government’s hiring as private NFPs declined only 18,000. On an unadjusted basis, payrolls actually have been increasing since August! Moreover we saw some major revisions to the upside for September and October. And there were more hours worked and better pay per week. That has to be supportive.
My takeaways:
- The big company bias of the establishment survey is not showing through in these numbers. Let’s see how the household and establishment surveys compare next month.
- When the August numbers came out, at the end of my post I said the year-on-year numbers were declining and that meant the worst was over. These numbers bear that out.
- When the September numbers came out, I said “I would anticipate job gains to appear by the end of the year or early in 2010.” I still believe this and am much less doubtful about employment causing a near-term double-dip.
- When the October numbers came out, I said the jump in the unemployment rate was misleadingly high. I still believe that and see today’s numbers as ‘give back.’ Nevertheless labor force participation rates are decreasing and that means that the unemployment rate should go higher as these workers re-enter the workforce and new ones join.
So, there will be no double-dip due to employment in the short-term. However, the threats to a sustained recovery are later in 2010 and 2011. They consist of higher taxes and/or lower spending at the federal level, revenue shortfalls for municipalities and states, writedowns in real estate, and protectionism choking off trade. To prevent a bad outcome, we are going to need to create more jobs than we are doing at present. Incentives via tax credits or a payroll tax deduction are things I have advocated in the past. I also advocate direct government jobs programs.
Most important is the need for the federal government to support states like Georgia, Florida, Ohio, Michigan and California where things are still falling apart. Next year it won’t just be California in trouble. You are likely to see across-the-board state and local government tax increases and/or spending cuts and job layoffs again next year just in time for the mid-term elections unless the federal government comes to aid. If the Obama Administration decides to follow the strategy they have committed to, you will have a perfect storm that spells double-dip late in 2010 or 2011.
Therefore, despite the bullish report today, more job creation is needed. Listen to the following 50-minute broadcast on the Diane Rehm Show with three respected economists (Dean Baker, Mark Zandi and Richard Rahn) talking about ideas to create more jobs in 2010.