Recession at half time?
Recession historians on Wall Street often consider a downturn over when job declines fall to half their peak.
The July employment report, with its revisions, takes us past this milestone. The numbers were better than expected in almost every respect. There was even a tick up in hours worked, especially in manufacturing. The output component of the recession has probably already ended.
Even so, the labor market is likely to remain grim for a very long time. That a decline in payrolls of 247,000 should be taken as good news is an indication of how bad things have become. Such falls were close to the average in most postwar recessions, not an indication that the worst was over.
In the recession of the early 1980s, the peak job loss was 389,000. In this recession it has been around 740,000. So we are still on a different trajectory. The United States may continue to bleed jobs at a fast pace for some time to come.
There has seldom been more slack in the labor market. Businesses have plenty of room to increase the working hours of existing employees — which have declined far faster than in previous downturns.
Part-time workers can be brought fully on board. Only then might companies add to payrolls.
After the end of the 2001 recession, it took 21 months for the labor market to fully turn around. Even the White House, which is becoming much better at managing expectations, is saying that it still expects the unemployment rate to reach 10 percent.
Once people lose their jobs, they are also spending longer out of work than in previous downturns. In the recession of the early 1980s the average spell of unemployment reached a peak of 20 weeks. Now it is at 25 weeks. A third of the jobless have now been without work for more than six months, up from 29 percent in June — both post-war records.
This is bad news for consumption, since state payouts typically cover less than half of a previous salary.
For America’s hobbled banking system the ever growing duration of unemployment is almost as ominous as job destruction itself. Few consumers have sufficient precautionary savings to continue to service debt for such extended periods once their income is halved.
Under an optimistic scenario, in which job creation rebounds to about 100,000 a month, it will still take five years to recover the more than 6.6 million jobs lost during the recession. This should keep consumer spending weak and means that the United States will remain vulnerable.
Over coming months the temptation to ease off the monetary and fiscal pedals will increase. It should be resisted. Policy makers should get used to looking at economic data in absolute as well as relative terms.