December 06, 2002
Bad Employment News

Bad employment news today. The unemployment rate jumps three-tenths of a percentage point to six percent, and seasonally-adjusted nonfarm payrolls fall by 40000.

The root of the problem is that the speed of the recovery in output is relatively slow, and that potential output is growing so d***** fast because productivity growth is high. Certainly I keep raising my own personal estimate of medium-term potential output growth by what seems to be one-tenth of an annual percentage point every month:


WSJ.com - Unemployment Jumps to 6% As Manufacturers Slash Jobs: WASHINGTON -- The jobless rate jumped to 6% in November as employers unexpectedly trimmed their payrolls. The job cuts were steepest among manufacturers and retailers, and dashed hopes that the ailing labor market had stabilized. The report Friday from the Labor Department was a bleak snapshot of the labor market at a time when many economists believed that the worst was over for job seekers. Economists were expecting a rate of 5.8%, only a slight increase from the 5.7% recorded in October, according to a survey by Dow Jones Newswires and CNBC. November's level of unemployment matched the rate in April, which was the highest since July 1994.

Nonfarm business payrolls declined by 40,000 last month after a 6,000 gain in October. Economists had expected payrolls to rise by 35,000. "The labor market remains weak," said Paul Kasriel, chief domestic economist at The Northern Trust Co. in Chicago. "Unfortunately I don't see much on the horizon that's going to strengthen it."...

Posted by DeLong at December 06, 2002 11:18 AM | Trackback

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I notice in a comments thread further down that you dismiss the 'Thatcher effect' explanation of productivity growth, in which the closure of inefficient plants raises the average. But at least for manufacturing, the effect seems to be evident. Manufacturing output has fallen about 6 per cent from its peak in 2000, while hours have fallen about 13 per cent - both figues are larger for durables. It seems difficult to draw strong conclusions about potential output when actual output is weak.

Posted by: John Quiggin on December 6, 2002 12:24 PM

Brad

Why is it that you do the math and others do not?

4% GDP growth and 5.1% productivity growth last quarter.

While you come to the conclusion that there is no reason for employers to add staff, economists quoted quite often by the press seem shocked by the employment sluggishness.

Posted by: on December 6, 2002 12:29 PM

In spite of the bad employment numbers, the markets closed up today. They must be signaling their approval of the departure of the Bush economic team.

Posted by: on December 6, 2002 01:51 PM

What reason is there to believe that any Treasury Secretary will set a course other than that dictated by Karl Rove and Company? Aimed at pleasing the right right right....

Posted by: on December 6, 2002 02:04 PM

First, productivity is a derivative statistic. It's not that GDP and productivity produce employment, it's that labor and capital produce GDP and GDP/labor is productivity.

As regarding: " . . . . While you come to the conclusion that there is no reason for employers to add staff, economists quoted quite often by the press seem shocked by the employment sluggishness." the economists quoted by the press are usually not the sharpest tacks in the drawer and usually tell the reporters what they want to hear. Employment is a LAGGING indicator. If employment is still not growing in 2-4 quarters, then we'll have a problem.

Posted by: Anarchus on December 6, 2002 03:08 PM

I'm not sure that it's precisely the Thatcher effect, though I wouldn't be surprised to see a manufacturing squeeze, especially at the heavy end. What I do note, though, which may suggest rocky times ahead, is that from a European perspective, there's tremendous slack in the US service sector: that's to say, there are lots of jobs that could be easily eliminated (GAP greeters, grocery packers, etc) which weren't there in the 1980s in Britain. Not fun.

Posted by: nick sweeney on December 6, 2002 06:15 PM

In spite of the bad employment numbers, the markets closed up today. They must be signaling their approval of the departure of the Bush economic team.


Well, I think it's more that the market didn't care about the departure - a non-event which had already been expected (in the case of O'Neill). The market didn't stay down on the bad employment numbers because the market cares more about the payroll numbers, which have been significantly below 400 000 for several weeks running, and seem to show that the U.S. has turned the corner on unemployment. Whether that is so or not, time will tell.

Posted by: Andrew Boucher on December 6, 2002 07:52 PM

Sorry, I meant of course that new claims for unemployment benefits have been significantly below 400 000 for several weeks running.

Posted by: Andrew Boucher on December 7, 2002 02:49 AM

The stock market doesn't care that much about payrolls or productivity data because there is real-time information on profits available. Productivity data is released 2 months after the fact and payrolls is a 1-2 weeks late. Walmart knows its sales data in real time, and by hook or crook, markets discount this real time info for companies, long before it makes into quarterly earnings reports or government statistics.

Posted by: Peter vM on December 7, 2002 06:48 AM

Unemployment is actually a somewhat odd statistic. On the one hand it increases or decreases based on prior economic growth, on the other hand the way it is reported is in advance of the numbers on economic growth. Thus it is a closer real time number than economic growth statistics. Second unemployment will rise or fall based on economic growth above or below the rate at which productivity and population growth are growing. So what Brad is saying is not that the economy is not growing, but that it is not growing sufficiently fast enough to overcome the rates of productivity growth. The other number in the article indicates jobs are declining, this is apparently at odds with new unemployment claims, but unemployment claims are stable at a relatively high number, and the legnth of unemployment is growing. In other words new people are entering the ranks of the unemployed in greater numbers than they are leaving.
Lawrence

Posted by: lawrence on December 7, 2002 12:41 PM

Specific claims regarding the stock market's discounting of information (Walmart sales or jobless claims vs the jobless rate) seem a bit dubious, especially when single individuals claim that many thousands of other individuals prefer one set of data over another. The best we can do is assert (hope) that market participants do a good job of discounting all available information. There is a heck of a lot more information in the monthly jobs report, regarding the distribution of job gains and losses, hours of work and so forth, than in the weekly jobless claims data. One problem with the weekly data not suffered by the establishment survey is that it relies on individual behavior that is highly subject to things like weather, holidays and big sporting events.

As to the notion seen in press coverage that the 40k loss of jobs is bad news, it needs to be said that the anticipated 30k-35k rise was bad news of just about equal magnitude. The difference is tiny. The rise in the jobless rate to 6% takes it back to the recent high registered in April. That, like the 40k drop in jobs, may just be noise within a range of results that suggests a static job market. We already knew the labor market was flat.

The expectation tht there is another shoe to drop in the services sector is not supported by the data, as far as I can tell. Managers in the services sector face similar pressures from stock holders to those faced by managers in the goods sector. I certainly do. There is no reason to think they have left their staffs larded up with unnecessary workers. Thus, as long as services employment continues to rise (as it has since February, if memory serves) the services sector deserves the benefit of the doubt. While productivity as measured is derivative, the processes that drive productivity gain are central to economic performance. If the services sector begins to crank up productivity gains (the behaviors that lead to productivity gains) at anything like the pace that the goods sector has been, then services employment will suffer a prolonged slowdown, just like the goods sector has. Otherwise, there is nothing other than a drop in overall demand that would lead to a big drop in service employment, and goods sector employment would probably slow first.

Posted by: K Harris on December 7, 2002 07:45 PM

America has a significant personal savings deficit, especially so for an aging population. The savings deficit will have to be made up over years, and I am rather worried about the resulting effect on asset prices as we become more savings conscious. Economists at Yale and USC are researching and writing on this issue and the work so far in not encouraging.

Brad has written somewhere that the low American savings rate is among the chief economic puizzles of the past generation. I wonder if it may as well be among the chief problems to come.

Posted by: on December 8, 2002 08:29 AM

Brad has made the problem clear: GDP growth is too slow to create enough jobs to keep demand high enough to generate moderate inflation. The result of high productivity growth and relatively low GDP growth is possible deflation.

Much of Asia is experiencing deflation, Germany is close as is the Euro bloc. America has a GDP price deflator figure that is 0.8% at present, a 50 year low.

Posted by: on December 8, 2002 08:45 AM

The American savings rate is low, but savings deficit is inaccurate. For the world, production less consumption equals savings. And for the world, savings equals investment.

For the U.S., aggregate domestic savings are less than aggregate domestic investment, so there are capital (savings) inflows from overseas helping fund investment here. As long as it's not too large or two volatile, it's not necessarily a negative. As for the impact on asset prices if/when Americans start saving more, well that would be good for stock prices at the margin, so I say, bring it on . . . . .

Posted by: Anarchus on December 8, 2002 10:14 AM

Americans ARE saving more. If memory serves, savings as a % of personal disposable income has risen from around 1% in 2000 to 4% now. This is a rational response to capital losses, just as the falling savings rate in 1994-2000 was a rational response to windfall capital gains.

Posted by: Peter vM on December 8, 2002 11:50 AM

For all of those who think an aging saving short America bodes well for stock prices, I suggest the following article. We have experienced 3 years of declining household net worth. This is indeed a serious problem.

John Geanakoplos of Yale, Michael J. P. Magill of the University of Southern California and Martine Quinzii of the University of California at Davis

"Demography and the Long-Run Predictability of the Stock Market"

(http://papers.ssrn.com /sol3/papers.cfm?abstract_id=329840)

Posted by: on December 9, 2002 11:34 AM

A higher personal saving rate in America will mean lower consumption and corporate revenue growth and may well be a pressure on stock prices.

Aging Americans may well sell of assets gradually to maintain consumption standards and so place further pressure on stock prices.

Posted by: on December 9, 2002 01:41 PM
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