Labor Market Sending Mixed Signals on Recession
The labor market may be weak, but that doesn't necessarily mean the US economy is in a recession or on the verge of one.
Friday's nonfarm payrolls report defied expectations for a modest gain by showing a decline of 17,000 in January – the first in several years. But the unemployment rate also declined, easing to 4.9% from 5%, despite predictions it would either be unchanged or edge up.
The usually important payroll and jobless data has taken on even more significance because the labor market is considered the most reliable indicator of a recession. In early January, when the government reported that the jobless rate jumped to 5% from 4.7% in December, it set off recession alarms because the rate was more than half a percentage point higher than the low during the expansion phase of the economic cycle.
But the latest jobless rate data has fueled the conviction among some economists that the recession talk may be premature.
“One of the things that makes the recession signal ‘work’ is that once it is turned on, it typically stays on,” said Robert Brusca, chief economist at Fact & Opinion Economics.
“That signal is formed when the rate of unemployment rises from its cycle low by more than 0.5 (of a point). The rate needs to stay at 5% to turn that signal on and keep it on in this cycle.”
Other economists thought the payroll data tipped both the debate and the economy on the recession side.
‘”The poor jobs data are the strongest evidence so far that the economic expansion is grinding to a halt,” wrote Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland, taking the more conventional view. “The economy is in recession mode. “
But if January’s data did provide conflicting signal, revised payroll data for December and November arguable added more confusion to the equation. Payrolls in December -- thought to be the start of the recession for those predicting one -- were revised up from a surprisingly weak 18,000 to a more respectable 82,000, but November’s original gain of 115,000 was halved to an increase of 60,000. Both of those numbers are close to the consensus forecast for January of 70,000. The government also trimmed job growth for October.
“January is a month in which the number employed drops, not seasonally adjusted, following all the seasonal hiring in December,” said Brusca. “So we depend a lot on seasonal factors in January to get things right.” He adds that “weather undoubted contributed to some of this weakness even for construction, where jobs fell sharply again.”
That volatility and unpredictability also seemed to be borne out in January’s weekly jobless claims. The first two weeks showed claims barely above 300,000 – 350,000 is thought to be the dividing line between growth and contraction – while the third week – reported just Thursday -- came in at 375,000. The four-week moving average, which is considered more reliable and less volatile – was just under 326,000.
Economists attributed some of that oddity to the fact that the Martin Luther King holiday fell about a week later this year, which wound up affecting two weeks of data, producing a wide divergence.
The next two months also typically complicate labor data and that they more the case this year. Not only is February the shortest month – and includes a major holiday – this year it will be a day longer because of the leap year. March is always unpredictable because it is a swing month between winter and spring.
More Mixed Signals
Recession debate aside, there is little doubt the labor market is slowing. Job growth for all of 2007 was lowered by more than 150,000 to just over 1 million, the weakest showing since 2003. Also troubling is that growth in private-sector jobs has been shrinking significantly since 2005, when it grew at about a 2-percent annual clip.
Economist Ken Goldstein, who specializes in the labor markets for the Conference Board, does not think the economy is in recession, adds that the “economy is too slow to open up more than “50,60,70,000 jobs.”
Before the release of Friday’s data, Goldstein predicted that “Another “lousy number … will feed this idea that if labor market is that bad then the economy is in recession or going into recession.”
Private sector data have also been clearly pointing to a weakening labor market, but its mixed nature hardly scream recession.
For thee months in a row month, the Institute for Supply Management’s employment index has posted a reading below 50, which signals a contraction.
On the other hand, ADP's monthly private employment report released earlier this week showed a large jump for January. The report said, "January's increase of 130,000 is consistent with nonfarm private employment growth that averaged 110,000 during the three-month period from October through December 2007."
In addition., the latest survey on corporate layoffs by Challenger, Gray & Christmas showed a marked slowdown, despite "recession buzz.
Different This Time?
Economist and professor Nouriel Roubini, who definitely believes a recession started in December, says “We didn't have excessive employment growth as in previous booms” and with a lean-and-mean corporate payroll structure “you don’t need massive job losses for the consumer to retrench.”
Roubini, Goldstein and others argue employment is a lagging economic indicator and that is borne out by history, much the way it also shows you can't have a recession when employment is growing.
In 2005, one of the strongest years for GDP growth during the latest economic expansion, the unemployment rate was over 5 percent all but two months of that year. The jobless rate had peaked at 6.3 percent in June of 2003, about 18 months after the official end of the recession.
“It took an extraordinary long time to get jobs back,” says Josh Bivens, an economist at the Economic Policy Institute, who adds that payrolls eventually rose above their pre-2001 recession peak. “I think we’ve got plenty to lose.”