August 6, 2009
THE LONG & WINDING ROAD AHEAD
The trend is still our friend when it comes to initial jobless claims, a valuable leading indicator for assessing turning points in the business cycle. (For some background, see our analysis published in March.) But increasingly it's the lagging indicators that worry us. Topping the list of concerns is the trend in nonfarm payrolls, which continues to sink at an unhealthy pace. Will tomorrow's update on the employment picture for July tell us different?
Before we consider the possibilities, let's review today's good news. New filings for jobless benefits slipped by 38,000 to 550,000 for the week through August 1, the U.S. Labor Department reports this morning. And not a moment too soon. Recall that new filings rose last week, prompting worries that perhaps the trend was reversing, which could indicate that the recession might roll on longer than previously thought. In light of today's update, we can rest a bit easier, although we're still a long way from repairing the damage that has unfolded in the economy over the past year.
Indeed, even an optimistic reading of recent economic trends should recognize that the bulk of the good news, such as it has been lately, suggests the economy has hit bottom, which is something quite different than declaring that growth has returned. In fact, the jury's still out on whether we have truly reached the trough in the business cycle. There are a growing number of reasons for thinking that we have, including the downward trend in jobless claims, which have a long history of peaking concurrently or just ahead of the end of the recession. But let's be clear: Full and complete confirmation of the expectation that the recession has ended will only come after the fact. We'll simply have to wait and see. For now, however, it's still reasonable to think that the worst of the contraction is behind us.
But that leaves the still sobering challenge of climbing out of the hole. Having fallen into the ditch, we're of a mind to rejoice that we've hit bottom and sustained only minor injuries, which is to say injuries that are something less than the catastrophic wounds that many feared were inevitable in late-2008 and early 2009. Alas, lifting the economy out of this gully is going to be tough, much tougher compared with recoveries in previous post-recession periods. Once we get beyond the point of comparing current conditions to the deeply depressed results of late last year and early this year, the outlook will look a lot less encouraging than it does now.
For that reason, we continue to emphasize that the technical end of this recession appears imminent if it hasn't already arrived. But the great challenge is on the post-recession period. Perhaps the first big news of this new era will come tomorrow, when the government delivers the update on nonfarm payrolls for July. The consensus forecast calls for a loss of 300,000 jobs, and that's the favorable prediction relative to the bigger decline of 440,000 anticipated by All About Hiring Demand.
Granted, a 300,000 job loss, or even a decline of 200,000, would represent substantial progress vs. the much bigger losses of past months. Yet therein lies a prime example of why the recovery this time will be unusually slow and subject to setbacks. Indeed, the crowd is likely to cheer if tomorrow's employment report advises that 300,000 jobs were lost last month. But keep in mind that more than 6 million nonfarm payrolls disappeared since the recession began in December 2007. Returning employment to where it was at the recession's start will take a powerful recovery, the likes of which are nowhere in sight at the moment.
The point is less about trying to throw cold water on the post-recession outlook and more about reminding everyone that patience will be essential for the period that awaits. We're going to be hearing a lot about green shoots and recovery in the weeks and months ahead. Yes, that's coming, but it's going to be quite a while before the trend has any significance on Main Street.
Posted by jp at August 6, 2009 10:37 AM
The trend is that these initial releases are revised downward. CONSISTENTLY. Why even comment on the "initials"? It doesn't even qualify as noise as far off as they have been.
I think we'll see more "brown shoots" tomorrow.
Posted by: Mark at August 6, 2009 7:31 PM