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August 2, 2008
The good and the bad in the employment report
Here's the monthly report from the BLS.
Let's start with the bad. The unemployment rate was up 0.2%. While I was expecting a little more of an increase, it is still a negative signal. Also, 51,000 nonfarm payroll jobs were cut last month. It is now quite clear that employment peaked in late 2007 and has been trending down ever since. Finally, as Brad DeLong points out:
The U-6 measure of unemployment--reported unemployed plus part-time for economic reasons plus marginally-attached workers all divided by the labor force plus marginally-attached workers--has risen by 1.1 percentage points in the past three months to its current level of 10.3 percent. It now stands 2.2 percentage points above its mid-2000s low, and is just a hair below the maximum reached in the 2001-2003 episode. As you all know, I have been unhappy with the conventional unemployment rate this decade--it has not been telling the same story as the other labor market indicators. U-6 seems to be a better fit to the overall state of the economy.
And by my book, U-6 is now telling us that we are in a recession.
I share his unhappiness with the conventional unemployment rate. It's a rough guide at best. And while I do think that U-6 is a useful indicator, what DeLong doesn't point out is that even today U-6 is a good point-and-a-half below where it was in 1994 (earliest year for which data is available in that series). That was a couple years after the end of a historically shallow recession (granted, it was still a period of labor market weakness).
So yes, some aspects of the economic situation are about as bad as during and shortly after the 2001 recession. Some are worse, and some are not as bad. When you consider the fact that the weakness in manufacturing is part of a longer term structural change, it looks less like a traditional recession even though it may soon (if not already) meet the NBER business cycle dating committee's criteria. If you're in some (though not all) types of manufacturing, this has been one long recession for a decade.
Other sectors of the economy, most notably education and health services, are probably wondering what all the fuss is about. They didn't feel the recession in 2001 and probably won't here either.
So that's the bad news.
But there is a silver lining. First, the average seasonally adjusted mean duration of unemployment dropped from 17.5 to 17.1 weeks. Next, and I think this is a crucial point, the percentage of the unemployed who are reentrants or new entrants to the labor market both increased. In fact, since March, the percentage of the unemployed who are job losers dropped from 53.7% to 50.2%. Reentrants have increased from 27.4% of the unemployed to 30.8%. New entrants have increased from 8.8% to 9.2%. Here's a chart for reentrants. (See also Table A-8 in the report.)
It should be pointed out that this is a pretty noisy signal over the time horizon of a few months to a year. This isn't enough to conclusively determine that a recession is over--if there was one to begin with. However, it is something that bears watching over the next few months. Roughly half of the increase in the unemployment rate this month was due to reentrants into the labor market.
Here's my bottom line. If we have turned the corner and are at or near a the bottom of this business cycle, then you're going to see unemployment due to reentrants rise further, which may temporarily (i.e. between now and the election) push the headline rate higher. If we have not yet turned the corner, then this may have been noise and the labor force participation rate may fall a bit in coming months. I can't say which it is yet. I don't think anyone can.
But the labor market is a lagging indicator, so if the rise in reentrants is not just noise, then that is good news indeed. But the U-6 number is bad news any way you slice it. So yet again we are left longing for more information. The economy remains at a critical point--teetering on the edge of a recession. Maybe in one. Maybe pulling out of one. I do have a feeling that if a recession is declared, it will not be declared until we are actually out of it. Perhaps we already are. But the labor market weakness lasts a couple years after the "official" end of a recession, so keep that in mind going forward.
Posted by William Polley at August 2, 2008 12:14 AM
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Comments
The question of what happened in the early 1990s--whether it is best viewed as a short and shallow recession followed by a "jobless recovery" or as something significantly worse--is contested...
I'm not sure which side I come down on in that debate--I change my mind from week to week. But the fact that U6 was high in 1994 is not an argument that U6 is not an important and useful indicator, IMHO at least...
Posted by: Brad DeLong at August 2, 2008 1:12 PM
I definitely think it's an important and useful indicator. I acknowledge that above. What I'm not as sure about is whether it is saying we're going into or coming out of an NBER recession.
For starters, given that they only have the U-6 series going back to 1994 gives us only one recession to use as a reference. (As I recall, one of the big revisions in the survey in 1994 was in the classification of marginally attached and discouraged workers, so there's really no hope of comparing with anything before that.)
And if you compare U-6 now with our experience in the early part of this decade, you might be inclined to say that we're at the end of a recession as the NBER might see it a few months hence.
I'm becoming more and more convinced that a recession might be called for late '07 and early '08 (if I were betting, I'd put chips on November through July or August). But that's also assuming that the positive indications I mentioned in the post are really positive indications and not noise.
But labor market weakness lasted well into the mid '90s after the 1990-91 episode, and into 2003 in the last episode. Which means that even if we did have a recession and even if we later find out that we're currently in the latter stages of it, it still means that labor markets could be a problem until 2010 and U-6 could rise for the remainder of the year--or longer.
Maybe that's what U-6 is telling us. But I don't know.
Posted by: William Polley at August 4, 2008 12:06 AM