Once again this morning, the BLS employment release tells conflicting stories depending on whether one looks at the unemployment rate or job growth.   The U.S. unemployment rate fell from 8.3% in July to 8.1% in August, continuing the gradual three-year downward trend (from its 2009 peak at 10 %).     Political economy equations often say that the direction of movement of the unemployment rate in the period preceding a presidential election is the main economic determinant of whether the incumbent is re-elected.  

“Are we better off than we were four years ago?”   Yes.   If the criterion is to be a narrow unemployment comparison, and one counts from the month following the day Obama took the oath of office, then we are now at a lower unemployment rate.   But that is very simple-minded as a criterion.   (Look at GDP.  Better yet look at how the free-fall turned around  and the recession ended within his first 5 months.)

Employment growth is the more important statistic, to evaluate the progress of the economic recovery.  Here today’s BLS report was disappointing: only 96,000 jobs created.    The jobs number climbs into six digits if one looks at private sector employment growth.  

By the way, am I the only one who sees a general bias toward negativity in the media?   When the unemployment number looks bad and job creation looks good, like a month ago, the newspapers seem to headline the former.   When the unemployment rate looks good and employment disappoints, as this time around, they tend to focus on the latter.  The TV shows do the same (including those on which I appear).

In any case, as always, one should look at a longer run trend.   The fact is that private sector job growth has been running at an annual rate of 162,000 per month over the last two years.    This is far greater than the rate during the Bush Administration even if one looks only at the years in between the Bush recessions of 2001 and 2008  (83,000 per month, on average, from November 2001 to December 2007.)   It is not enough.  For example it is much less than the rate during the Clinton Administration, month in, month out (218,000 private sector jobs created per month, on average).  But it is a big improvement over where we were.

On the subject of Bill Clinton.  His speech to the Democratic Convention  Wednesday night again demonstrated his unique ability to explain wonkish policy details in a folksy way.    This included pointing out the statistics on private sector job creation under Democratic presidents since 1961 compared to Republican Presidents.   The rate has been just over twice as great.   Thus the current Obama-Bush comparison continues a half-century tradition.

The point about private sector job expansion looking better than overall employment growth is of course what Obama was trying to say in June when he made his unfortunately worded statement that “the private sector is doing fine.”   He quickly retracted that language, which was the right thing to do.  But the point still needs to be made.

Why look at private sector jobs, instead of total jobs?    I have a feeling that this is a Republican way of looking at things.  The Republicans don’t seem to believe there is anything amiss if a million public sector workers lose their jobs.  (Which is what has happened over the last year:  934,000.)    Teachers, firefighters, construction workers…   Apparently those don’t  count as real jobs because they are in the public sector.    That would explain the Republican congressional opposition to Obama’s initial fiscal stimulus in 2009 (the one that ended the recession) and their more successful subsequent attempts to block Obama’s job proposals.  

So maybe we should be looking at total employment after all, rather than private employment.  Or even focusing on the underemployed and discouraged workers.  But these are all reasons why we need to resume enacting the policies that Obama has been trying to enact.

The BLS this morning reported U.S. job gains of 163,000 in July, which is good news in the eyes of the financial markets.  The jobs data had been disappointing over the preceding three spring months.  Before that, during the winter months, employment growth was strong.

In terms of perceptions and politics, pundits will say that today’s report is good news for Obama’s re-election prospects, just as they said the spring jobs numbers were bad news for the President.  But my interest is in economics and reality, rather than perceptions and politics.   From a longer-term perspective, a few important facts have not been adequately discussed.

• 1. The rate of job growth over the last two years, 137,000 jobs per month, inadequate as it is, has actually been greater than the rate of job growth during the George W. Bush Administration (101,000 per month) even if one excludes the two Bush recessions that occurred in the first and last years of his administration, respectively.   The Obama Administration looks even better if one confines the numbers to private sector employment, since the government has been shedding jobs under Obama and was growing rapidly under Bush. Of course this is still nothing like the sort of progress we would ideally want to see - say, the 237,000 jobs that were created month in and month out on average during the 8 years of the Clinton Administration. And the number of long-term unemployed remains worryingly high. But the situation is a big improvement over the economy that Obama inherited three years ago.  

• 2. An unemployment rate of 8.3% shows that the economy is still in unsatisfactory shape.   (The July numbers show a rise from 8.21 to 8.25, which the BLS labelled “essentially unchanged” in the first sentence of its release.)   Unemployment remains higher than what the Obama Administration hoped we would have by now at the time it took office in January 2009.  Most of the difference can be explained by the fact that the level of economic activity in January 2009 - as a result of the free-fall in the last part of 2008 - was much worse than was realized at the time. The subsequent downward revision by the Commerce Department in the official statistic for the level of GDP at the start of 2009 can explain why the level of the economy is disappointing 3 ½ years later, more than the rate of growth over the intervening period. After all, those horrendous 2008 rates of decline in GDP and employment turned around during the six months immediately following the day Obama took office.  

• 3. Most private-sector and independent economists agree that the Obama fiscal stimulus made a positive difference; that - together with TARP and monetary easing by the Fed, unpopular as they are in some circles — it helps explain the mid-2009 economic turnaround; and that it helps explain the moderate growth that followed (2 ½ % growth p.a. in the 2nd half of 2009 plus 2010).   A good explanation for the disappointingly slow rate of growth in output and employment since the end of 2010 is that the fiscal stimulus has been withdrawn and the government sector has been contracting. (Since the November 2010 election, there have been enough Republicans in Congress to block the American Jobs Act and every other action that Obama proposes.)  One can see this in the composition of both GDP and employment. Today’s jobs report features another 9,000 jobs cut in state, local, and federal governments, continuing the pattern that has held throughout the recovery: jobs and output in manufacturing and the rest of the private sector have been expanding, partially offset by contraction in the public sector.

              The NBER’s Business Cycle Dating Committee, of which I am a member, announced this morning that June 2009 was the trough of the recession that began in December 2007.    It was the longest recession since the 1930s.

              It is the fate of the Committee to be teased mercilessly every time we make one of our formal declarations of a turning point in the economy.   We get it from both directions:    We waited too late to call the end of the recession, or we did it too early.     (Occasionally someone makes both criticisms simultaneously!)   Even The Daily Show got in on the fun this time.

              On the one hand, people say “Who needs the NBER to tell us what we already knew?”    It is true that GDP has been expanding for 5 quarters now, and that most economists have therefore considered the recession over for some time.   But it is not that easy to call the precise trough, for several reasons:  different indicators say different things regarding the precise date of the bottom, data get revised, and we could not have been confident until now that a hypothetical new downturn would count as a second recession instead of a continuation of the first one.    Does the 15-month lag in this announcement seem like a long time?  It took us 18 months to declare the end of the preceding recession (2001).

              On the other hand, people say “It doesn’t feel like the recession is over to me or to people I know.  How can the NBER be so out of touch?”   The main answer, here:  The proposition that the recession is over is only a statement that things are no longer getting worse; it is not a statement that we are back to good times.    The economy still feels bad for good reason:  it is bad.  In particular the unemployment rate is still very high.   But things are much better now than they were 18 months ago, when the economy was in freefall, or in mid-2009, when we were at the bottom of the worst downturn since the Great Depression.  It takes a long time to emerge fully from a hole that deep.  And, to be sure, the current pace of the expansion is disappointingly slow, especially with respect to jobs.  But GDP and employment are, at least, rising.

              The other question that we are asked the most is whether one should worry about a double dip recession.  The NBER does not forecast.  I can speak only for myself.    The possibility of a new downturn is indeed a concern, especially because Washington has been unable to deliver a sensible fiscal response. (A sensible policy in my view would consist of some more stimulus, as in February 2009, designed to maximize bang-for-the-buck, coupled with simultaneous steps to move the long-term fiscal path back toward responsibility, such as social security reform).    But even without an appropriate fiscal response, I am optimistic that we can avoid sliding back into a second outright recession.  More likely, we will have a slow continuation of the current (inadequate) recovery.

The recession is over.   The last piece has fallen into place, with the BLS announcement that employment rose in March.

Identifying the beginnings and ends of recessions has been difficult in recent decades because the two most important indicators, output and employment, have sometimes behaved differently from each other.  Most notoriously, in the recovery that began in November 2001, employment lagged far behind economic growth.  If one had gone by the labor market, one might have called it a three year recession.  But if one had gone by GDP, one might have wondered whether there was a recession at all.

This time around, the difficulty is not so great.   (more…)

At first glance, the job numbers of the last week seem to offer a mixed and confusing picture.   On the one hand, today’s headline from the Bureau of Labor Statistics certainly sounds like good news:  the unemployment rate finally dropped below 10.0% — to 9.7%.   On the other hand, today’s establishment survey of employment, which most of the time is a more reliable measure than the unemployment rate, still shows job change numbers that are negative.   Furthermore, recent numbers on claims for unemployment benefits have been discouraging.   

To reach an overall evaluation, one must take a longer-term perspective. (more…)

The economy has been on a roller coaster ride since the cyclical peak of December 2007. (See illustration.) The gradual slide of early 2008 turned into a terrifying freefall in the last quarter of 2008 (after the Lehman Brothers bankruptcy) and the first quarter of 2009. Now the train is probably at the bottom of the roller coaster valley.

The Index of Leading Economic Indicators, represented by the first car in the train, was this morning reported to have risen for the seventh consecutive month in October. Similarly, consumer confidence is substantially improved relative to February (though it, like all economic statistics, has experienced some bumps in the ride). The important middle cars, which represent measures of aggregate output, probably reached bottom in the early summer, and then started back up.  The BEA’s advanced estimate for GDP growth in the third quarter was 3 ½ % .

The jobs measures are lagging well behind the rest of the train, as usual.
Among three key labor market measures, the hours worked series has apparently reached the bottom. Employment is still falling, though thankfully not at the very rapid pace of a year ago. The unemployment rate brings up the rear; people in that car are understandably unhappy.

In the July employment report released by the BLS this morning, August 7, the labor market shows its first encouraging signs. Most commentators will focus on the jobs numbers, which show a decline of less than half the rate that the economy experienced in the “freefall period” of late 2008 and early 2009.

Employment tends to lag behind production. For this reason, as readers of this blog will know, my preferred indicator is total hours worked. The latest numbers show that the length of the workweek has begun to rebound from its record low of two months ago. As a result, the BLS reports that total hours worked in the economy did not decline at all in July, for the first time since the financial meltdown of last September.

One never wants to read too much into a single report, especially one subject to revision. But when today’s labor news is combined with a variety of other data, it looks likely that the economy is finally at or near the turning point.

Hours Worked  (Changes) from the Current Employment Statistics survey,
Bureau of Labor Statistics, Aug. 7, 2009

Year       Jan   Feb   Mar     Apr   May   Jun                    Jul   Aug   Sep     Oct  Nov  Dec
2007    -0.5   0.0   0.6    -0.3   0.5   0.1                   -0.2 -0.1   0.1      0.2   0.2   0.1
2008    -0.3  0.1 -0.1     -0.1 -0.5 -0.5                    -0.2  0.2  -0.6   -0.8 -0.9 -0.9
2009    -0.7 -0.6 -1.2    -0.6 -0.3 -0.7(P)                0.0(P)

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The quip “There are three kinds of lies:  lies, damn lies, and statistics” is variously attributed to Benjamin Disraeli or Mark Twain.   What should the public make of government statistics, such as the monthly employment report released today, Thursday, July 2, by the U.S. Bureau of Labor Statistics (BLS)?  

There is no lying in US government statistics.   But there are always commentators who will use the numbers to make whatever point they want.     One should learn enough to be able to interpret the numbers for oneself.     That is the only way to prevent being misled.

Of the many numbers contained in the BLS reports, I view three as especially important.    

The most salient figure politically is the unemployment rate, which hit 9.5% in June, according to Thursday’s report.    This was the highest level since August 1983 and clearly reflects the current extent of distress in American labor markets.

Critics of the official statistics like to point out that the unemployment rate does not capture discouraged workers who have dropped out of the labor force because they couldn’t find a job.  True.  But the government isn’t trying to make the unemployment number look smaller.   Rather, it is just too difficult to decide who is a “discouraged worker,” as opposed to simply being out of the labor force.   So the BLS always defines only those who have looked for a job recently as being in the measured labor force.   This still allows us to compare changes in unemployment over time, which is the purpose of the unemployment rate.   The agency does compute a measure that attempts to include discouraged workers and part-time workers — the U-6 series — but I don’t think it is right to call this the “real unemployment rate.”   

The second important number in the labor market reports is employment, that is, the number of workers who have jobs, which was down another 467,000 in June.    This is the statistic to which the financial markets and macroeconomic forecasters pay the most attention on a monthly basis.  (In that sense, the question of discouraged workers is a red herring.)     Employment peaked in December 2007, the start of the recession.    Since then, we have lost 6 million jobs altogether.   The current recession is now both the longest-lasting and the deepest since the 1930s.    But at least the period of the steepest rate of job loss –  November 2008 to March 2009 – appears to be behind us.  

Two details about the jobs number.    First, the statisticians get the “employment” number through one method, by surveying establishments (employers), while the unemployment rate uses a measure of employment derived through a different method, by surveying households.   The employment number is generally considered more reliable because it is based on a wider survey — another reason to prefer it.  

The second point is that, for purposes of comparison across different business cycles, we still need to divide employment by something.     If not the labor force, then what?   We must, at a minimum, allow for population growth.    So it is useful to divide employment by total population.  This way we don’t have to attempt distinctions about which Americans might be prepared to take a job under the right circumstances.  The fraction of the population (civilian non-institutional) with jobs peaked at the end of the Clinton Administration, reaching 64 ½  % in January 2001.   It has now declined to 59 ½ %.

Although the financial markets pay most attention to the number of workers with jobs, employment is not much good for forecasting the overall economy, because it tends to be a lagging indicator.   Even when firms see economic activity starting to pick up, they delay hiring, because it is costly to find, hire, and train new workers – not to mention to fire them again if the recovery turns out abortive.   

For this reason, the third indicator is my personal favorite for gauging the business cycle in real time:  the rate of change of total hours worked in the economy.  Total hours worked is equal to the total number of workers employed, multiplied by the length of the workweek for the average worker.   The length of the workweek can be expected to respond at turning points faster than does the number of jobs.  When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off.    The phenomenon is called “labor hoarding.”  Conversely, when demand begins to rise, firms tend to increase the workweek, before they hire new workers.   (To take two historical examples, the “change in total hours worked” improved in both April 1991 and November 2001, which on other grounds were eventually declared to mark the ends of their respective recessions.)   

The workweek reached a historically short level in June: 33.0 hours.  Not a good sign.    As one consequence, total hours worked fell 0.8% that month, continuing the same rapid deterioration we have seen since last September, the month when Lehman Brothers failed and the recession worsened sharply.  

The bottom line for the economy:   despite signs in other areas that the recession is leveling out – most importantly, production and sales — the labor market indicators in themselves are not yet signaling a turning point.   Thus the June numbers confirm the evaluation I made a month ago, based on hours worked in May, that the apparent good news in the widely reported May employment number was probably an insignificant blip.   The bottom line for newspaper readers:   master your statistics, so that they can’t master you.

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The rate of decline in employment moderated substantially in May, according to the BLS figures released June 5, to about half the monthly rate of job loss recorded over the preceding six months (345,000 vs. 642,000).    The news was received in a variety of ways. 

First, the cynics.  They tend to wax sarcastic at the idea of “things are not getting worse quite as fast as they were” as a good-news proposition.    But a wide variety of recent data indicate that the economy is no longer in the state of free-fall that it entered last September, and this is indeed good news.  To begin to level off is the first step toward the start of the recovery.

Second, the academics note (correctly) that there is little information in each individual monthly statistical fluctuation that is measured, because the data are inevitably noisy.   Still, the public wants to know, in real time, what is the best we can glean from the information we have. 

Third, the financial press, in particular, had been asking whether this quarter could turn out to be the bottom of the recession.  The May employment report encouraged enthusiastic speculation that the answer was “yes.”  The stock market reacted positively.

The members of the NBER Business Cycle Dating Committee (of which I am one) will be responsible for calling the trough when the time is right.  We have a range of views regarding the proper place of employment numbers in such deliberations.    But one can say, on the one hand, that a decline in economic activity is a decline in economic activity, and therefore still a state of recession, even if the rate of decline has moderated a lot.    One can also say, on the other hand, that employment is usually a lagging indicator of economic activity.  (For example, the economy continued to lose jobs long after the ends of the 1991 and 2001 recessions.  Hence the “jobless recoveries.”)

Speaking entirely for myself, I like to look at the rate of change of total hours worked in the economy.  Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker.   The length of the workweek tends to respond at turning points faster than does the number of jobs.  When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off.  Conversely, when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers.   (The hours worked measure improved in April 1991 and November 2001 which on other grounds were eventually declared to mark the ends of their respective recessions.)     The phenomenon is called “labor hoarding”  and it is attributable to the costs of finding, hiring and training new workers and the costs in terms of severance pay and morale when firing workers.

Unfortunately, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all.  Forbes picked up on the point. The length of the average work week fell to its lowest since 1964 !  The graph below shows that, not only did total hours worked decline in May, but the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September.  Hours worked suggests that the hope-inspiring May moderation in the job loss series may have been a monthly aberration.  If firms were really gearing up to start hiring workers once again, why would they now be cutting back as strongly as ever on the hours that they ask their existing employees to work?   If one factors in falling wages, to compute total weekly earnings, the picture looks still worse.  My bottom line:  the labor market does not quite yet suggest that the economy has hit bottom.