Tuesday, June 9, 2009

The establishment survey tells a different story about the recovery!

A paper in the Economic Letter at the San Francisco Fed (FRBSF) got a lot of media attention, suggesting that the recovery in the labor market will be slow:
The share of workers who have been laid off temporarily, rather than permanently, is at very low levels, and the number of workers who are involuntarily employed part-time is at historical highs. Both of these factors are likely to slow the recovery of the outflow rate over the course of the next several years.
But this is only half of the story; and I believe that these results are somewhat overstated. The other half of the story is on the establishment side of the report, which reports average workweek across industry.

At the Federal Reserve of Chicago (FRBC), Danial Aaronson argues that the labor fluctuations have been "normal" given the magnitude of the output gap (i.e., current rate of production is less than that with full utilization of resources) using previous recessions as a guide. He suggests that the average workweek, which is has declined precipitously to 33.1 hours per week, is holding up better than expected (given the output gap, of course). Finally, that firms are generally not hoarding labor; firms at the heart of the recession are firing at record levels.

Aaronson even suggests that anecdotal evidence points to the manufacturing sector as reducing hours in order to save jobs (i.e., hoarding labor). Specifically, they offer this:
Much of this reflects the nature of this recession, with the decline in residential housing happening early on, followed by the credit crisis and the fall in consumer demand. Labor market performance in other industries [outside of construction, financial services, and leisure and hospitality] has looked fairly typical for a recession of this size. That said, work force adjustment continues and is not fully reflected in the data through 2009:Q1. For instance, some more recent anecdotal evidence has noted further efforts to reduce hours in order to avoid additional layoffs in manufacturing.5
What this means to me is this: that the reduction in labor hours - voluntary or involuntary - is warranted. And that perhaps the surge in involuntary part-time employment (which may be holding up better than one would think) is suggested by the massive output gap. Productivity (see below) remains positive, suggesting that firms are generally not hoarding labor. Therefore, the recovery implied by the FRBSF paper may be slightly overstated.

Annual productivity growth (chart to left) has remained remarkably positive throughout the Great Recession! (In six of the last ten recessions, productivity growth turned negative, and the rest except for the '01 and '90 recessions, neared zero.) Since productivity growth has remained very positive, 1.9% over the year in Q1 2009, firms are firing at record rates; and perhaps they are firing more "coincidently" than in previous recessions.

However, this is untrue in manufacturing, where productivity growth is the lowest since the series was first measured in 1987, -3.2%over the year. To me, this suggests that non-manufacturing industries will be forced to hire once positive demand is established.

Rebecca Wilder

3 comments:

  1. David Rosenberg has a different view:

    We have to put the data into perspective. Before the Lehman collapse, when equities were in a moderate bear market and bonds in a moderate bull market, the worst nonfarm payroll result we saw was -175,000. We don’t seem to recall too many pundits rejoicing over employment declines at that time, which were basically half of what was just posted in May. Moreover, the worst nonfarm payroll number in the 2001 recession — right after 9-11 — was -325,000; and before that, at the depths of the 1990-91 recession, the worst report showed a -306,000 print. So basically, what we saw today was a number consistent with a deep recession — just not quite as deep as the near-6% at an annual rate contraction we saw in the first quarter. It is difficult to rejoice over an employment data that is consistent with real GDP still declining anywhere from a 2% to 4% at an annual rate. Now here we are, close to nine months after the Lehman collapse, and we are still printing employment numbers that are double what they were before pre-Lehman. That is the bigger picture. Moreover, the internals of today’s report, in a word, were awful. Not only are businesses still cutting jobs but they are also reducing the hours that their employees are working; the private workweek hit a new record low of 33.1 hours (from 33.2 hours in April). So, total labour input was much weaker than the headline payroll suggests and this is vividly illustrated in the aggregate-hours worked index, which fell 0.7% MoM and something ‘green shoot’ advocates will not like discuss since this was actually worse than the 0.3% MoM drop in April; this takes the three-month trend to a -8.6% annual rate. Think about that for a moment because what goes into GDP is total hours worked and productivity — so the latter better continue to hang in there or else we are going to be seeing some nasty output data going forward that may well take Mr. Market by surprise. Put another way, if companies had held hours worked constant in May instead of cutting them, to achieve the total labour input they achieved last month would have required — get this — a 927,000 payroll cut. ‘Green shoot’ indeed.

    Also:
    The number of part-time workers rose 129,000 last month and by 2.5 million since the recession began a year-and-a-half ago. So it’s not as if all the laid off full-time workers are losing their jobs; nearly one-in-three are being pushed into part-time work. But a record share of the 2.7 million working part-time — more than one-third — are working part-time because they have no choice (due to the weak economy). The number of people working part-time but want full-time work has risen a record 70% over the past year. Remarkable and disturbing.

    While there was so much focus on the change in the nonfarm payroll headline figure, it was easy to miss the important shift taking place beneath the surface. It may be true that companies are not cutting back on bodies as much as they were earlier this year because nobody wants to let their skilled staff go despite the lingering weakness in sales. So the strategy remains one of cutting back on hours worked at the same time — not as many layoffs but the effort to economize on the wage bill remains intact. What has happened this cycle is that the shift towards part-time and away from full-time has led to a dramatic reduction in the average workweek to a record low 33.1 hours. If we took into account the total decline in labour input in May — the aggregate hours worked index sagged 0.7% MoM — the total job loss in May exceeded 900,000. In fact, this was almost exactly what the population and payroll concept adjusted Household Survey showed, to very little fanfare (-833,000).

    Etc., etc.

    ReplyDelete
  2. "To me, this suggests that non-manufacturing industries will be forced to hire once positive demand is established"


    More Wal-Mart greeters/stockers and Micky D's burger flippers will be needed, huh?

    Now let's just get these people to buy $200k homes on $6 a hour and a new Obamamobile, re-create 2006 and all will be well.

    ReplyDelete
  3. The last reminded me of the scene in Animal House where the Student Body President (I think) is standing in the middle of the chaos in the parade saying, "All is well; all is well" or something like that.

    ReplyDelete