The economy continues to recover in a number of key areas, but it’s still not obvious that the labor market has joined the party. Yes, the latest nonfarm payrolls report was encouraging, but today’s labor market news on new filings for unemployment benefits leaves us wondering (again) if the recent end of job destruction will quickly bring job creation.
Initial jobless claims jumped sharply last week to 484,000, the Labor Department reported this morning. That’s the highest since late-February. As always, the standard caveat is relevant here: initial claims are volatile and so any one reading should be taken with a grain of salt. That said, it’s getting harder to dismiss the trend this year for this series: treading water.
As our chart below shows, last year’s progress, which cut jobless claims to roughly 450,000 by the end of 2009 from more than 600,000 earlier, seems to have stalled. For most of 2010, jobless claims have been stuck in the 450,000-to-500,000 range. That’s a problem since it suggests that the labor market isn’t creating enough new jobs to soak up ongoing job losses. Yes, jobless claims have a history of stalling in post-recession recoveries. In that respect, perhaps there’s nothing abnormal here. But that doesn’t change the fact that the job losses over the past two years are unusually high, and so the pressure to mint new jobs quickly is urgent to keep the current recovery going.
In broad terms, the recession is technically over. But it’s not clear that the economy is poised to create new jobs on a scale that’s needed to address the 8 million-plus jobs lost since January 2008.
Using the history of the business cycle in the U.S. as a guide, jobless claims dipped to a trough of under 300,000 after past recessions in the last generation. To be sure, the fall in jobless claims takes time. After the 2001 recession, for instance, jobless claims (based on a four-week moving average) finally slipped under 300,000 in…2006!
On the other hand, job losses in the 2001 recession were comparatively mild vs. recent history. Nonfarm payrolls shrunk by a bit more than 2.5 million thanks to the contraction of 2001. How quickly did the labor market recover that time? Nonfarm payrolls returned to the old peak in 2004, or slightly more than two years after the recession officially ended in November 2001.
As for the current cycle, let’s assume that the recession ended last June. By the standards of the relatively mild 2001 recession, we won’t see a return to the old peak in nonfarm payrolls until June 2011, or a bit more than a year away. Don’t hold your breath. That possibility, of course, is highly improbable. As it now stands, the labor market is light by 8 million jobs relative to the previous peak in nonfarm payrolls. What’s more, the labor market has only just started to show signs of creating jobs on a net basis. The prospect of creating 8 million jobs in a year the equivalent of playing the lottery as a plan for paying off your mortgage.
We’re looking at a much longer recovery period for the labor market than any recessions since the 1930s. That’s old news, of course. But as today’s initial jobless claims suggests, we may need to be even more patient than we thought.