The Employment Report: Will the bad news never end?

Today’s employment report was bad, although not surprising, news. Job losses across sectors continued as they have for the past several months. The only mild surprise in the report was a drop in the number of people self reporting out of the labor force. This combined with the relatively minor losses in the household survey might give us an inkling of hope for the bottom. It’s too soon to draw any conclusion but if that continued for a couple more months I might get optimistic.

One of the key features of the employment report is the ongoing downward revisions to previous month’s reports. I took the time to download the real time data from the Philly Fed. The dashed line shows the number of job losses reported with the initial report. The sold line shows the monthly job loss as reported in the March 6th employment report. These revisions are unusual. The BLS’s methods are quite good and to get systematic revisions are unusual.

In particular, these revisions combined with the benchmark revision reported last month, have substantially lowered the level of December employment. Let me give one statistic in particular (and I only bring this statistic up because I was right). On December 11, I wrote a post predicting a loss of 933,900 jobs in December. Well, and this is completely meaningless, the difference between level of November employment as I knew it then and the level of December employment as we know it now is 938,000. Not bad for a Chicago-trained economist. Enough of that! Just keep in mind that we are still one benchmark away from knowing the job losses in the last 9 months of 2008. I suspect we will have another big round of markdowns to sort through next February.
Back to the employment report and its implications for the state of the economy. The next figure shows the level of manufacturing employment from 1939 to February 2009. In level terms, manufacturing employment is now below its post-war low (One exception, February 1946.) This is not the result of a long-term secular trend. The level of manufacturing employment rose, on average from 1939 to the late 1960. It was then reasonably stable from the 60s through 2000. (If I fit a line, I find the slightest downward trend.)

In 2000, the world changed. Between January 2000 and January 2004, the United States lost 20 percent of its manufacturing labor force and it never got it back. As of this report, we have lost almost 30 percent of our manufacturing workforce since January 2000. I hope these jobs come back but at the moment it does not look promising.

Of course, manufacturing as a share of employment has fallen steadily since the end of WWII. It is now the service sector that dominates the U.S. economy. The share of the service sector has risen steadily from around 60 percent at the end of the war to 85 percent today. This trend does not have to be bad for the United States. Many economists believe that it is the natural progression of economies: from agriculture to manufacturing to services.

In particular, the service sector has proven to be a source of stability over time. Service-sector job losses have tended to be much smaller than manufacturing losses. (We can argue about deviation from trend but I only care about outright losses at the moment.) Unfortunately, this recession has not confined itself to the manufacturing sector.

Take a look at the picture below. Job losses in the service sector are staggering. The service sector accounts for about half of the job losses to date, 2.1 million jobs in the last twelve months. In percentage terms, the twelve-month loss of jobs is 30 percent higher than the next biggest loss (recorded in 1949).

The cumulative job losses in this recession are stunning. That the losses are accelerating is worrisome. These job losses will push house prices (and other asset prices) down even further and push ever more households into foreclosure. More bad debt will put extra pressure on bank balance sheets. Bad bank balance sheets … It's Friday; let’s just call it a week.