Steve Blitz Morning Notes

Losing jobs at a slower pace only says that the “deep recession” is over and a milder downturn is underway. Talk of data turning positive and central bank exit strategies is putting several carts in front of the horse. It is true that the pace of layoffs is tailing off, but the average duration of unemployment remains at 25 weeks, a third of the unemployed have been so for 15 weeks or longer and the broad underemployment rate jumped up to a cyclical high of 16.8%.

The BLS birth/death adjustment also continues its upward trend, making the payroll numbers somewhat suspect. On a 12-month basis the b/d adjustment added 864,000 workers to the payroll compared with 838,000 for the 12-months ending in July. If not for the adjustment, the total number of jobs lost in the year ending in August would be 15% larger. When the revisions to the data are made much of the b/d adjustment will be wiped out and, perhaps, even turn negative.

Employment is a lagging indicator but to the optimism that an end is near I compare the diffusion index of employment change (the percentage of firms surveyed that are adding workers plus half of those holding jobs steady) to the change in payrolls (see chart below). The diffusion index of employment change has been rising the past several months and it increased in August to 35.2% from 29.9% in July. Jobs aren't added in earnest until the diffusion index is over 50 and the index is still well below the lows of the past three recessions.

The poor prospect for employment growth lies in the continuing accumulation of loss in wealth and income resulting from lower employment levels, the extended period of unemployment, and the increased number of marginal and part-time jobs taken when work can be found. There is a cyclical component to these figures but also a structural one. In other words, the prospect of consumers driving the economy is a long ways off.

An interesting side note to the August data is the loss in government jobs. While the Federal government is trying to do its part it is being more than offset by job losses in the Post Office and in state & local governments.