Saturday, April 3, 2010

Nonfarm Jobs: Historical Perspective

[Below is a a Chart of the Day commentary on the March employment numbers. Further below you will read my comments.]

Today, the Labor Department reported that nonfarm payrolls (jobs) increased by 162,000 in March -- the largest increase in three years. Today's chart puts that decline into perspective by comparing job losses following the beginning of the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-1999 (dashed blue line). As today's chart illustrates, the current job market has suffered losses that are more than triple as much as what occurs at the lows of the average recession/job loss cycle. It is also worth noting that previous job market declines did not tend to end abruptly but rather flattened out before moving back into an expansionary phase. Today's relatively positive jobs report provides an early indication that the current job market is moving from a phase of stabilization to that of expansion [emphasis mine].


My Comments:

I highlight the last statement from Chart of the Day’s commentary because it demonstrates the problems of deriving conclusions simply by looking at charts; namely, the concept of spurious correlation. In other words, that a relationship exists between 2 variables may in fact be caused by something else entirely. That is, correlation does not imply causation. This results in the idea that since unemployment has stabilized, growth will return. Furthermore, this conclusion is furthered fortified by the assumption that the past is indicative of the future. All chart lack context, yet they provide a valuable simplification of what is happening. But like all tools, they must be used appropriately.

The only valuable conclusion we can derive by looking at the chart is that the expected expansion most likely will be weaker than the 2001-2006 expansion. Weaker employment means a reduction in the confiscation base (i.e. tax payers). In light of burgeoning fiscal spending, this could translate in a greater deficit than expected.

Let me mention other things that were left out of the commentary above:

- The majority of job losses in the present recession originated in the bloated financial and construction sector. These jobs are not coming back!

- The 2001-2006 average was significantly below the 1950-1999 average.

- The phase of “stabilization to that of expansion” in the 2007-present bucket may mean an upward move that still falls below 0 percent. In plain English, this means nonfarm payrolls move from a phase of really ugly to really bad. This is a very loose sense of expansion.

- Intertemporal comparison is limited because the structure of the economy has changed over the years (e.g. manufacturing employment is not as relevant today vis-à-vis the past). This distorts averages.

- The chart does not mention anything about the long-term unemployed (i.e. those who have been unemployed greater than 27 weeks).

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