Today’s headline news on employment was better than expected and delivers some optimism that the economy is turning the corner but a deeper look adds to my view that the accumulated loss in earnings power continues to grow and will be a significant drag on consumer spending for some time to come.
On the good news front, there were reported job increases in autos and the Federal government and a sharp decline in layoffs by temporary help services. Some of these changes reflect quirky seasonals but the diffusion index (percent of firms adding employees plus one-half of those neither hiring or firing) was at 30.1 in July – up from a low of 19.6 in March and the best number since 33 in October (see chart). But consumers still aren’t expected to spend so the retail industry continues to lose jobs at an accelerated pace, in particular general merchandise stores.
First fired, however, are not first hired. The average duration of unemployment has now extended to 25 weeks -- a 5 week lengthening over the past four months. The percent of unemployed that have been out of work for more than 27 weeks rose to 33% in July from 27% in June and 19.3% one year ago. The unemployed for more than 15 weeks is now 5.1% of the total labor force. As the accompanying chart illustrates, this is far and away the highest number of the post-war meaning since the Depression. As the economy makes its shift to a lower-leveraged version, re-employment will be slow. Combining these figures with the absolute year-over-year decline in wage and salary disbursements one gets an accumulation of lost earnings that will drag down consumption for a long time to come.