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.