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Employment Recovery Continues to be Sub-par

Posted By Barry Ritholtz On January 11, 2006 @ 6:29 am In Economy,Employment | Comments Disabled

I have been having a debate with my friend Cody [1] over the employment data for some time now. Cody explains the subpar job performance because this recovery cycle started with such high levels of employment.

I believe the data belies that belief. So I propose the following: I will present my charts showing why this recovery is so weak, and challenge him to present historical data or charts supporting his thesis.   

I rely on three aspects to demonstrate the weak jobs market: past recoveries, the present labor participation rate, and the flip side of LPR, and the "slack" in the job market.

We have noted previously how the Labor Market continues to underperform prior recoveries [2]. As this chart from Northern Trust’s Asha Banglore shows, this has been a weak private sector jobs creation recovery:


Click for larger graph:

Payroll_employment_recovery [3]

Source: Northern Trust [4]

Not only has job creation lagged prior recoveries, but it appears to be flattening out at a point where in the past it was accelerating upwards. 

Banglore notes:

"Hiring in the current expansion is the weakest on record after four years of economic growth. The chart below is an index chart that measures growth in employment four quarters prior to the trough and 16 quarters after the trough. The payroll reading for the quarter when the recession ends is set to 100. For example a reading of 108 implies that payroll employment increased 8.0% from the level reported for the quarter when the recession ended.

Following this methodology, on average, in post war economic recoveries which lasted four years, payroll employment increased 11.6%. In the current economic expansion, hiring has increased only 2.6%. In the 1991 economic cycle, after four years of economic growth, payrolls increased 7.2%.

The current economic expansion could possibly end  with the fewest number of jobs created during an economic cycle in the post-war period."

How does that square up with the 4.9% unemployment rate? As we have discussed all too many times in the past, the employment rate is a percentage, a fraction with total full time employed as the numerator, and total labor pool as the denominator:

Employment Rate =  Total Employed / Labor Pool

Unemployment Rate = (100 – Employment Rate)

For those of you who may have forgotten your fractions, a percentage can rise in one of two ways:  the number on top goes higher, or the number on bottom goes lower. When it comes to the employment rate, that means either more people getting jobs (good) or more people dropping out of the labor pool (bad).

Yet another Northern Trust analysis shows why the unemployment rate has dropped so low: its for the wrong reasons:


Click for larger graph:

Lpr_civ [5]

Source: Northern Trust [6]


Note that the past five years have seen the first major decrease in Labor Participation Rate since the post-war period under President Eisenhower — about 45 years ago.

Banglore explains further: 

"The labor force participation rate has dropped each year in the 2000-2004 period (see chart 1) and held virtually steady in 2005. This is an atypical event because during economic recoveries the participation rate rises as more people enter the labor force.

There is no conclusive research explaining the reasons for the downward trend. Studies have shown that the civilian unemployment rate would be significantly higher than the current estimate of 4.9% if the participation rate were to mimic the trend of previous economic recoveries. In other words, the current reading of the unemployment rate partly exaggerates that implied strength in the labor market."

Next up, Joan McCullough thinks about NFP and the impact on the Fed:

"Finally on Friday, the Big Kahuna, NFP:  Okay. We all know that the headline was lame but that the saving grace was the revisions. You can call it “mixed” if you need an adjective, but here’s what we should be focusing on: the rate looks good on the 6 o’clock news, 4.9%, right?  But that’s where it ends. Because the only reason it’s down there is owing to the shrinkage in the percentage of the population who are actively participating in the labor force (employed or lookin’). The peak of the recent cycle was March of ’01 when the LFPR was 67.2%.  It currently stands at 66%, flat y/y. 

Does this tell you anything? It should scream volumes. If there were no slack in the labor market, prospective employees would be entering it in droves, not staying away/dropping out. As for earnings, December showed a +3.1% gain y/y [below inflation]. Thus John Q. remains below water.   

So there you have it. A trash heap of data amid claims of the latest emergence of the bull market.  Which is the proper reaction if you espouse the “market rallies when the FED is viewed as finished” rationale."

Lots of slack in the labor market, little in the way of wage pressure,
employees working longer hours — and without overtime — hence, the
productivity miracle.

At the same time, we see average hours worked [2] continues to increase.

If there were not so much slack in the labor market the productivity miracle would look far less miraculous: People would more readily be switching jobs; instead, they are scared witless about losing their employment — and even more importantly, their health benefits and medical insurance.

Back to the Fed:  I wonder how much impact they will have regarding inflation, considering their is no wage pressure. That’s one of the areas they have the strongest impact on. Overseas commodities demand is not an area they have much influence on, unless they induce a global recession.   


With this post, we add the category "Employment." (Hard to imagine this was never a subtopic . . .)

Payroll Employment Remains Soft Even After Four Years of Economic Expansion [7]
Asha Banglore
Northern Trust Economic Research: Daily Global Commentary, January 09, 2006   

Noteworthy Aspects About the Participation Rate (2000-2005) [6]
Asha Banglore
Northern Trust Economic Research: Daily Global Commentary, January 10, 2006 

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/01/employment-recovery-continues-to-be-sub-par/

URLs in this post:

[1] Cody: http://thecodyblog.blogspot.com/

[2] underperform prior recoveries: http://bigpicture.typepad.com/comments/2006/01/slowing_data.html

[3] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/payroll_employment_recovery.jpg

[4] Northern Trust: http://www.northerntrust.com/library/econ_research/daily/us/dd010906.pdf

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/lpr_civ.jpg

[6] Northern Trust: http://www.northerntrust.com/library/econ_research/daily/us/dd011006.pdf

[7] Payroll Employment Remains Soft Even After Four Years of Economic Expansion : http://www.northerntrust.com/library/econ_research/daily/us/dd010906.pdf

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