Jobs: “Less Worse” Is Still in Force

Today’s news from ADP, the payroll company, that the private sector shed another 298,000 jobs last month is more of the same. We have heard this kind of news for several months now: things are getting worse less badly. That’s an improvement of sorts and unavoidable. But it is frustrating.

The ADP numbers throughout the year have been a very good bellwether for the economy as a whole. In the first quarter we were losing around 700,000 jobs a month; in the second quarter that fell to 500,000; and now we are in the 300,000 range. Obviously the rate of loss is slowing . The bad news is that, according to ADP, we now employ about 2 million less people in the private sector than we did just six months ago. That’s an incredible contraction and sheds a very sharp light on the difficulty we face over the next year or two as the economy starts to grow.

While the rate of losses is clearly abating we seem to be a long way from turning the corner.

A less scientific report is the one published by Challenger, Gray, and Christmas the outplacement firm. They track layoff announcements rather than payroll numbers, so their data is indicative of business intentions and not an actual count. Nonetheless it provides good anecdotal support to the idea things are ‘getting worse less badly’. Their report shows that intended layoffs shrank last month about 21% from July’s high point. That’s good news. The flip side of this is that for the year to date we are seeing layoffs running over 60% higher than in 2008. The Challenger data is very limited in scope, but is useful because it tends to focus on small and medium business rather than big corporations. It helps us get an insight into a segment of the economy where the overall data is murky – the big shifts by large employers often overwhelms the large number of small movements within smaller companies.

Having said that, the employment picture is fairly consistent throughout business: jobs are scarce and far less abundant than a year ago. This contraction was not focused on one industry or one set of large employers – GM, and Chrysler’s travails notwithstanding.

What does this mean?

First, we have to wait for Friday’s government report. It looks as if that will be in line with the ADP data. Remember that the ADP report does not include government jobs, and is not totally comprehensive. My guess is that the government report will be about the same: there has been an increase in government jobs as the stimulus requires people to get it going, this gain will be offset by losses in the private sector that ADP doesn’t include. I my guess is correct then the government non-farm payroll data this week will be a disappointment to analysts whose average prediction was for a 250,000 job loss.

Second, the job market is proving to be very slow moving. I have hammered away at this issue here so much I am feeling very repetitive: until the job market improves the entire economy will languish. It may recover in the technical sense, but it will continue to fell rotten to the average family.

Third, with all that said there are plenty of signs that the economy is now growing. So let me present the brighter option: we can make an argument that the recovery might actually be very strong. This is because of the enormous underutilized capacity we now have. Typically the first stage of a recovery gets under way when inventories are adjusted back to normal levels. That requires extra production which acts as the ignition for the start of a new business cycle. The stage after the ‘ignition’ sometimes sees very rapid growth because there is a surge as that unused capacity comes back on line. The more unused capacity there is, the stronger the surge. And right now we have almost epic unused capacity.

Will this more optimistic scenario play out?

I doubt it. That overhang of unemployment will act like a damp blanket and slow everything down. But I would not be surprised to see a few quarters of growth, starting in late 2010, that are a little higher than the ‘normal’ of between 2.5% and 3.0%.

I hope that’s not confusing.

Let me summarize the outlook:

For the next few quarters, say until the middle of next year, I think we will see GDP growth generally below the norm. It will tend to bounce around a bit as the economy shakes off the recession. But unemployment and debt reduction by households will restrict consumption, and since our economy is built around consumption this clearly implies slower than normal growth. After that, once jobs become more abundant, we will have a period of a few quarters of growth above the norm as we re-absorb that capacity I just mentioned. Then, sometime in late 2011 or early 2012 we will settle back into the normal range.

One last thing: we should all remember that the job data we see and comment on is ‘net’ of any new jobs added. Even in these terrible months there have been jobs created. So the jobs lost are much larger the announced total – but some of them have been offset by job gains elsewhere. An economy as large as ours is perpetually destroying and creating jobs as new industries appear and old ones fade away. The problem we have now is trying to separate out the destroyed jobs that will never come back because that industry or business is never going to revive – think the auto industry, from those jobs that arelostmerely temporarily. Conversely we also ought to focus on where we imagine the new jobs of the future will come from, and which industries are emerging as major employers – think environmental clean-up. This is never an exact science, and it makes prediction about the job market practically impossible.

So, getting back to my comments about capacity utilization: in the past one of the great cyclical factors in America was the auto industry as it laid off workers for a few months during recessions and then re-hired in droves afterwards. To the extent that the auto industry is now permanently reduced as an employer its cyclical role is diminished. There doesn’t seem to be a single major industry emerging to replace it. This is why I feel the great swings in jobs that helped create the sharp up and down rhythm of the old business cycles during the 1950’s through the 1980’s are a thing of the past, at least for now. Our current job cycles appear to be long and painfully slow. That makes the entire economy move differently than before.

Which is why we are reduced to using odd phraseology to describe what’s going on: ‘less worse’ is awkward, but accurate. It will be nice to get back to more straightforward statements. Unfortunately that seems to be a way off yet.