The Employment Situation: Bad News for a Recovery

The economy lost 190,000 jobs in October, a significant improvement from early this year, but losses remain near the peak of the last two recessions. More importantly, several pieces of the jobs report point to a possible deterioration in the labor market and are unambiguously bad for the economic outlook.

Although the labor market has improved substantially since early this year, over the past three months, job losses stabilized around 200,000. We have never had an economic recovery with job losses at this level. I find it beyond belief that the economy is in the midst of a recovery with these losses.

Most forecasters a jobless recovery has already begun. But a jobless recovery is characterized by a weak but stable labor market, a market where losses have ended but gains have yet to occur. An economy can, apparently, muddle along without job growth; it cannot grow with large job losses.

So, even at this level of losses, an economic recovery is not in the cards. But, more worrisome, other indicators of the labor market are much weaker than the establishment survey and some of these indicators point to accelerating losses.

Initial Claims Remain Weak

I wrote almost a year ago on the strong long-term link between initial claims per month and job losses per month. At the time, claims were accelerating sharply and were pointing to unheard of job losses. Initial claims have, of course, improved. But they have not fallen quickly or robustly. Initial claims seem persistently stuck above 500,000 per week.

These initial claims are consistent with job losses between 300,000 and 450,000 per month.

The Household Survey is a Disaster

Once again, job losses as measured by the household survey are outpacing job losses from the establishment survey by a substantial number. From February to June, the household survey and the establishment survey were, on a twelve-month change basis, showing essentially the same job losses. However, since mid-summer, the household survey has pulled ahead by 878,000 about 292,000 extra losses a month.

As I wrote (here), the month-to-month changes in household survey employment are not a reliable indicator of labor market conditions. The survey is subject to substantial sampling variation and month-to-month changes can be absurdly misleading. I have found, however, that whenever the household survey jumps ahead of the establishment survey, in either direction, it tends to predict both the direction of the labor market and the sign of future revisions to the establishment survey.

The household survey, consistent with the claims data, is pointing to a much weaker labor market than is the establishment survey.

A Recession Dummy in the BEDS Model?

I don’t know why the establishment survey is so much stronger than other labor-market indicators. But, I do have a suspicion. A long time ago, I wrote about the Birth and Deaths model used by the BLS to adjust the establishment data. Essentially, the BLS uses this model to control for the number of businesses being created and destroyed every month. I suspect, but do not know, that the BLS is uses a recession dummy in the model. The recession dummy, if it exists, is important and likely substantially improves the performance of the model.

I suspect the BLS turned off the recession dummy in the third quarter. Without the recession dummy in place, the model will, for any given read of the source data, produce fewer job losses. Remember, I do not know that they use one. But, if I were using a model to estimate losses, I would include one. So, I suspect that they have one.

Takeaways

We cannot have a recovery, jobless or otherwise, if the economy continues to shed jobs at a rate of 200,000+ per month. The best indicators do not at the moment point to any further near-term improvement in the labor market. Until we see some substantial improvement in the labor market (at least 0 losses), the economy cannot recover.