“Only” 36,000 jobs lost in February. That is relatively good news. The storyline was the following. Given all the snow, we should have lost more jobs. 36,000 was a relatively good number because if there was no snow we would have seen growth. But we didn’t see growth. In addition, there is a lot riding on the March numbers which will be released April 2. Assuming no more snow, this argument predicts a big positive gain.

The real issue here is what the recovery will look like. Are we stuck in a quagmire of persistently high unemployment (the plank) or are we going to see a sharp rebound (the hockey stick).

I vote for the plank.

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Risk has greatly increased this week. There are two reasons.

First, the Euro-bomb could explode anytime.

Second, the U.S. government dropped a bomb in telling us that the employment losses during the current recession are far worse than people had believed.

The Euro Bomb

The EU is in a lose-lose situation. If they rescue Greece, then other countries will have their hands out like Spain, Portugal, and Ireland. There could be others too. I doubt the main players (Germany and France) will have the stomach to bailout so many countries. The fundamental problem is that it is very difficult (near impossible) to have a currency union without a political union. While Euroland rules were established (size of deficit, government debt), they were (and are) routinely violated and there is no way to enforce – because of the lack of political union.

You create moral hazard problems. Countries will borrow and spend with the expectation that the system will bail them out. Sound familiar? If the large countries even marginally violate the rules (size of deficit, debt), then this energizes the smaller countries to brazenly violate the rules of the game.

If the EU does nothing, then the Euro will likely fall apart (or at least lose some member countries)

The real question is how deep Germany and France will want to reach into their pockets to keep the Euro going.

The Jobs Bomb

Unemployment dropped by 0.3% to 9.7%. Good news, right?

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The economy is in much more serious trouble than news reports, policy makers and pundits might lead you to believe.

The Spin

It is amazing that most jobs stories featured upfront the revision to November’s Non-Farm Payrolls. November was revised to +4,000 from the original -11,000. A net gain. However, October was revised downwards – a complete wash.

The fact is that we lost a surprising 85,000 Non-Farm Payroll jobs. A widely respected economic consulting group expected +50,000. The market expectation was about flat.

I am convinced the situation is much worse than we are led to believe.

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There are two key questions: (1) is the improvement in the job picture sustainable and (2) if it is, how long will it take get back where we started in December 2007? While there is considerable disagreement in terms of general economic policies, most agree that jobs are the key to the economic recovery.

Summary of the release

In November, the Establishment Survey showed that only 11,000 jobs were lost. There were some favorable revisions to October and September data.

The BLS also reports Household Data and there can be big differences between the Household and Establishment Surveys. For example, October, the Establishment Survey showed a decrease in nonfarm payrolls of (revised) 111,000. However, the Household data suggested a staggering increase of 558,000 to the ranks of the unemployed. In November, the news was much better on the Household Survey. The Household Survey showed that unemployment decreased by 325,000.

To get the unemployment rate, you take the Household Survey unemployment (15.375 million) and divide by the civilian labor force (153.877 million) and you get 10.0% (actually, 9.9992% — so we technically lost the ten-handle!)

There was other good news. The all-in unemployment rate (U-6) dropped from 17.5% to 17.2%. Temporary hiring (a good leading indictator continued to increase (adding 52,400 to the rolls). Finally, the average work week increased by 0.2. This means more money in the pockets of consumers.

All of this is good. However, there are some issues (which I am sure you expect from me). Read the rest of this entry »

Amazing the difference one day makes in the employment outlook. Yesterday, the market shot up because “only” 512,000 applied for initial claims — down from 532,000 the previous week. We saw banners: “Employment Situation Improvement,” “We Have Turned the Corner”, and “Jobs Fuel Market Rally”.

Today we learn that 190,000 jobs were lost in October. That’s about 40,000 worse than widely expected. The unemployment rate rose to a 26 year high, 10.2%.

Understanding the numbers

For those of you that subscribe to my twitter, you know that I was critical of the analysis of the Initial Claims release on November 5. The media noted two pieces of good news. First, the level of claims decreased by 20,000. It is true that is good news. Second, Continuing Claims decreased by 68,000. It is not clear that is good news.

The reason is simple. Many people drop off the regular program not because they get a job — but because the program expires for them. These job-seekers then have a chance to apply for extended benefits or emergency benefits. Hence, you need to look a little deeper.

While the reporting of Extended Benefits and the Emergency program (EUC) is delayed, the recent numbers show an increase of 25,000 in Extended Benefits and a surprising 90,000 in the EUC.

The bottom line is that people are not getting jobs.

Let me give you some perspective on how serious this is. We have lost 7.3 million jobs in this recession. The last really bad recession began in 1981. Many don’t remember this was a time of considerable turmoil with some short term interest rates going above 20%! On a population adjusted basis, the jobs lost in the recession that began in 1981 was 4.3 million. At the time, that was really bad.

In addition, it is not over.

Yes, it is true that the rate of job loss is slowing. That is good news. However, we really need to get at least +100,000 in non-farm payrolls to stop the rate of unemployment from rising. We need about +200,000 to start recovering jobs. That is hugely different from where we are today.

Now, you are used to me saying negative things. I did see three pieces of good news in the employment report. First, temporary employment rose by 33,000. That is often a leading indictor of employment bottoming out. Second, the amount of overtime slightly increased. Again, this is a leading indictor. Finally, the revisions of the previous two months were also good news.

My guess is that the temp employment and the overtime are completely overlooked by market observers. Read the rest of this entry »

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 Given the decrease job losses and other favorable (or less bad) news, it appears as if the economic storm is abating — or is it the calm that you feel when the eye of the hurricane passes over?

There is unambiguous information that the rate of job losses is decelerating. “Only” 216,000 jobs were lost in August. The unemployment rate increased due to three reasons: (a) the job losses in August; (b) a revision upwards in the job losses in July; (c) and new people entering the labor force – perhaps reentering after a prolonged period of unemployment.

However, in my opinion, there is very little to call “good news” here.

Let’s summarize:

• We have lost 5.02% of the labor force to unemployment during this recession, over 6.9 million jobs
• This is now the worst episode in the post WWII period (this month it became worse than 1948).
• This is not the end. Remember the government stress test has the “worst case scenario” of 10.3% in 2010. We are getting close to that now.
• This is the time of maximum government spending. Just as the clunkers program has ended, the amount of government spending will begin to decrease.
• We have yet to see the peak in foreclosures and defaults in both residential and commercial real estate. That should happen sometime in 2010.
• We will see surprisingly positive growth in Q3 and people will declare the recession over.
• Even if such declarations are true, we are not out of the woods. The combination of three economic forces will slow growth in 2010.
  • A new wave of stress on the financial system due to surging defaults on prime mortgages and commercial real estate.
  • The continued constraints that small and medium sized businesses face in getting credit. These businesses drive employment growth.
  • Little or no action from consumer spending – which represents 70% of GDP. Consumers need to protect themselves by saving. No job is safe right now.

The Consumer’s Problem

Let me comment a bit on the consumer. The consumer has taken multiple body blows.

• A dramatic wealth hit due to degradation in the value of their main asset — housing. Indeed, for most homeowners with mortgages, their equity has been wiped out (or negative).
• A wealth hit due to a drop in the value of other holdings (like 401Ks).
• Unemployment and fear of potential future unemployment.
• Unease over future obligations as the government racks up record deficits and debt.

You put this altogether and it seems unlikely that the consumer is going to be the engine of the recovery. Savings rates were driven to very low levels during good times. This recession is shockingly bad and it caught most consumers by surprise. Indeed, we really haven’t had a deep recession in almost 30 years — people forget.

The result is caution. Consumers will build their savings for three reasons. First, many fear losing their jobs — or being paid less in the future. Second, the savings were close to zero to start with. Third, they want some insurance for the future.

All of this spells slow growth.

I am not sure when they will officially date the end of the recession. I had originally forecast the end of 2009. However, the more important issue has to do with growth prospects going forward.

Interpreting the Data Going Forward

The data will be difficult to interpret. We will see strong Q3 growth which is really due to government spending (which cannot be indefinitely maintained) and some inventory adjustment (firms have let inventories run so low that there needs to be some production to restock). Neither of these positive forces is sustainable.

While I am more pessimistic than most, let me say something optimistic. The Unites States is in far better shape than European countries or Japan. So, while this might seem for the U.S. to be a painful period of slow growth, we will gain ground globally with respect to other developed countries.

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See below my monthly employment graph that standardizes the job losses (based on the size of the labor force) across different recessions.

On June 19, 2009, a premiere economic consulting firm (not to be named) forecasted a job loss of 275,000 in June.

To me, this seemed odd. The May drop of “only” 345,000 jobs (unrevised) seemed like noisy data. There was no substantial change in Initial Claims for unemployment insurance. Initial claims were running more than 600,000. The ADP also remained at an elevated level. The May ADP number showed a job loss of 532,000. Why should a lower reading be repeated in June?

We are in the mode of seizing any piece of good news as evidence of the turning point. So what, if the May Non-Farm Payroll number was inconsistent with Initial Claims and the ADP? A green shoot is a green shoot.

Throughout June, nothing really changed on the employment front. People viewed it as good news that initial claims were running in the 610,000 range rather than the 640,000. We were going to see a much better number for June. As I said, as of June 19, the Non-Farm Payroll loss was pegged at 275,000.

But 610,000 Initial Claims, while better than 640,000, is still terrible news. The ADP on Wednesday completely deflated the unrealistic expectation of a substantial turnaround. The ADP came in at a job loss of 473,000. Economists quickly revised their expectations.

The job loss today of 467,000 was no surprise to me (and to readers of my blog). This is consistent with the forecast made by CFOs in the latest Duke-CFO survey. The CFO survey, conducted in May 2009, suggested that private sector jobs would be scaled back by a staggering 5.6% over the next 12 months. Given the addition of public sector jobs, I estimated the net job loss over the next 12 months to be 4 million (this assumes 2 million public sector jobs are created). We are 1/5th of the way there (May+June losses divided by 4 million).

Perspective

• We have lost 6.46 million jobs in this recession
• We have lost more jobs in this recession than double the sum of the previous two recessions!
• We are 400,000 job losses away from the worst job loss situation since WWII. Technically, the recession of 1948 is still worse. However, it is a weird recession with one amazingly bad month. The percentage loss of jobs in October 1949 would have caused a print of -2.5 million losses today (in a single month).
• This ain’t over yet.

The Main Systemic Risk Factor

My main worry is that policy makers and risk managers at financial institutions have greatly underestimated the impact of unemployment on prime mortgages. Given that housing prices are falling at a 19% annual rate and given that many people with prime mortgages are losing their jobs, it makes sense that more and more people will choose to default on their prime mortgages. Note that 20% of homeowners with mortgages are underwater — what they owe on their mortgages exceeds the value of their houses. The assumption of a 2-4% loss on prime mortgages in the Treasury’s adverse stress test scenario seems unrealistic to me.

Increased defaults on prime mortgages could easily cause a second credit crisis.

Remember when the sub-prime crisis started? People initially said it was no big deal because the size of the market was small. Well, it was a very big deal and, yes, the size of the market was small. The prime market is gigantic and a surge in defaults in that market could quickly wipe out the capital of our financial institutions.

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The losses are staggering. If the pace of January and February continued through the year, we would lose 8.4 million jobs in 2009.

That is unlikely, but it will be ugly. Consider the following facts.

The percentage job losses have now exceeded the deep 1981 recession. Since December 2007, we have lost 3.17% of nonfarm jobs. In 1981, we lost 3.07%. But we are not done yet.

The recent survey by Duke University and CFO Magazine had CFOs cutting 5.7% of their workforce in 2009. Further, they see the recession lasting another 14 months.

Let’s do some calculations. There are 111 million private sector jobs. 5.7% layoffs means 6.3 million jobs lost in the private sector.

Currently, the labor force is 154 million and there are 12.5 million unemployed, implying an unemployment rate of 8.1%.

Now suppose the CFOs are correct and we lose another 6.3 million jobs and the unemployed rise to 18.8 million (12.5+6.3). That implies an unemployment rate of 12.2%.

So you think the CFOs are pessimistic? Well, maybe they are. But we are forgetting something. We are measuring “planned” workforce reductions. This number does not include the layoffs that result from firms going out of business. Hence, there is reason to believe the number could be greater than 6.3 million.

Wait, we have forgotton the “stimulus” plan. In the most optimistic (and unrealistic) projection, 3 million jobs are created. This means (only) 15.8 million unemployed and a rate of 10.2%. In my opinion, it is more realistic to think that 1.5 million new jobs are created by the plan. This leaves us with 11.2% unemployment.

There is a serious disconnect here.

The Obama economic team’s analysis of the stimulus plan had unemployment capping out at 8% (with the plan). We have already blown through 8%.

More seriously, the so called “stress test” assumes a worst case scenario of average 8.9% unemployment in 2009. That is not a worst case. That is not even a realistic projection. We could hit 8.9% in the next two months! Oddly, the “baseline” scenario, also has 8.9% unemployment in 2009. What kind of scenario analysis has identical projections for “baseline” and “severe”?

Unfortunately, the news gets worse. Unemployment lags the business cycle. This means that even if there is a recovery in the economy in 2010 unemployment will likely continue to increase. The stress test worst case had unemployment increasing 1.4 points in 2010.

The recent data suggest: (1) the situation is much more severe than our policy makers are letting on and (2) the stress test exercise for our financial institutions will have little value because of the unrealistic assumptions about the economy in 2009.

Given the trillions that we are shelling out, I think we deserve transparency and straight talk. It is better to tell us how bad it really is than to sugar-coat some economic projections that will surely lead to future disappointments — and decreased confidence.

The unemployment rate in December 2008 was 7.2%. We heard that initial claims for unemployment were greater than expected last week.

What does this mean?

As usual, it is difficult to navigate the data. We were told there were 589,000 initial claims in the week ending January 17. This was 82% higher than the comparable week last year.

What’s worse is that these are not real numbers — they are seasonally adjusted. The unadjusted number is 769,000 which is down from the disasterous 957,000 in the previous week. Yes, that’s correct. In the past two weeks, 1.7 million people made an initial claim for unemployment insurance.

This bad news was not reported in the press.

In this video blog shot on January 22, 2009, I analyze the outlook for unemployment.

Watch on YouTube

or

Streaming Video from Duke University

Image courtesy of flickr/Daquella Manera

“The worst job numbers since 1945”, we heard from CNN this morning.

Well, that is not true. Today is different from 1945 for two reasons. First, our population is much larger. Second, there was an important technical factor — WWII (in September 1945 non-farm payrolls plunged by almost 5%).

Nevertheless, the news of 524,000 losses was bad enough. The real loss was close to 700,000 if you include the negative revisions to October and November.

How many more jobs will we lose?

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