Worst is over for U.S. job losses

October 13, 2009

Kurt Karl-Kurt Karl is chief U.S. economist for Swiss Re. The opinions expressed are his own.-

Ongoing job losses pose a severe threat to the nascent U.S. recovery because they weaken consumers confidence and their ability to spend.

In September, another 263,000 jobs were lost in the U.S., worse than August’s 201,000 job drop, though much better than the 741,000 jobs lost in January of this year – the worst month is this cycle.

Employment is down 4.2 percent compared to a year ago. Hours worked for nonfarm productive workers were down 1.8 percent, while their average hourly earnings were up only 2.5 percent.

Thus, it is no surprise that overall wage and salary income is down by 5.2 percent compared to a year earlier. This huge downdraft on wage and salary income has lowered consumer confidence, as measured by the Conference Board, to its lowest levels since the inception of the survey in 1967.

Not surprisingly – with declining income and low confidence – U.S. consumers have become more frugal, pushing the savings rate up to nearly 6 percent in May, up from 0.8 percent in April 2008.

To get a full income picture, it is necessary to review income after-taxes and after-inflation, or real disposable income. This income measure has been bolstered by tax cuts and transfer payments, such as unemployment insurance, social security and welfare.

It has also fallen a great deal during the downturn (see figure), but by a lot less than wage and salary income. In fact, it was up just slightly, year-over-year, in August, when measured on a three-month moving average, partially due to the income factors mentioned but also to lower energy prices compared to last year.

American consumers are remarkably resilient – consumer spending has been rising month-on-month — up 0.2 percent, 0.2 percent and 0.9 percent for the three months ending in August. Unfortunately, the large jump in August was mostly due to the expired “cash-for-clunkers” program, which was intended to provide economic stimulus by increasing car sales and promote the use of fuel efficient cars.

Thus, real consumer spending will be anemic in the fourth quarter.

The clunkers program boost sales from a 9.6 million annual rate in second quarter to 11.2 million in July and 14.1 million in August, before falling back to 9.2 in September. The good news is that the September rate is near the pace of the Q2 rate, despite the clunkers program ending in August.

To achieve sustainable consumer spending growth, employment must stabilize quickly. Employment growth always lags output growth and the bottom of the cycle. However, in deep recessions the lag can be very short. After the severe 1981-82 recession, employment growth resumed quite quickly so the trough for employment was only one month after the bottom for the economy.

On the other hand, the low point for employment after the mild 2001 recession came 21 months after the recession trough. For the current cycle, the nadir for employment is likely to be earlier than after the last cycle – within 10 months – given the pattern of improvement that has transpired since January.

Assuming the trough of this cycle was June – since industrial production has been rising since July – then employment will be growing before April 2010, thus assuring the sustainability of the consumer spending turn-around begun last quarter.

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