SERIOUS MONEY:The US unemployment rate is unlikely to drop below 6 per cent until 2015
STOCK MARKETS got off to a solid start during the first trading days of the new year as excess liquidity continued to push prices higher. A decidedly cheery consensus has permeated Wall Street thinking, and nine major firms collectively published more than 3,500 pages of rosy predictions for the year ahead, anticipating double-digit gains for the major stock market averages as the nascent economic recovery gathers momentum.
The first blow to this consensus duly arrived with the release of the monthly payrolls report, which showed that the US economy lost 85,000 jobs in December against expectations for a flattish print.
Investors shrugged off the disappointment and the fairytales continue even though careful analysis of the underlying data demonstrates that labour market trends can be described as nothing less than shocking.
It is important for investors to appreciate that the monthly employment report contains surveys of both company establishments and households each month. The financial markets typically focus on the payrolls number collected from the establishment survey as it tends to be less volatile on a month-to-month basis than the comparable number derived from the alternative household survey, which includes the unemployment rate data.
However, the establishment survey has a large-company bias and typically fails to capture labour market trends among small businesses, which are the engine of job-creation for the US economy.
The household survey has a more expansive scope, and tends to be a leading indicator of payroll data at turning points. In this regard, the trend apparent from the household survey is far from encouraging.
The headline payrolls number, derived from the establishment survey, showed a disappointing loss of 85,000 jobs in December, but the disappointment pales in comparison to the massive 589,000 decline reported in the household survey.
The household survey has registered an average monthly loss of 374,000 jobs over the past six months versus the 134,000 average monthly losses evident in the establishment survey. The unemployment rate, which comes from the household survey, has increased by half a percentage point to 10 per cent over this period, but only because of a mass exodus from the labour force, which has seen the share of Americans either employed or actively looking for work drop to the lowest level since 1985.
The labour participation rate has dropped 1.2 percentage points over the last year to 64.6 per cent, the largest drop on record. As a result, the number of people classified as “not in the labour force” has jumped by 3.5 million. The drop in the participation rate has been particularly pronounced among individuals in the 16-24 age group, and suggests that the unemployment rate will remain elevated for an extended period as the disillusioned return to the labour force.
Indeed, should the participation rate increase gradually to its pre-recession level of 66 per cent by the end of 2012, the US economy would need to add 225,000 jobs every month simply for the unemployment rate to remain at current levels.
In this context, it is useful to note that the highest 12-month average payroll gain during the previous economic expansion was 239,000 net job additions per month during the spring of 2006. The average monthly gain for the entire economic expansion was less than 100,000 jobs per month.
The state of the labour market is captured well by broader measures of unemployment. The so-called labour under-utilisation rate, which, in addition to all unemployed workers includes those marginally attached to the workforce and those working part-time for economic reasons, has more than doubled from a cycle low of below 8 per cent to a record high of 17.3 per cent.
In contrast, labour-market under-utilisation was essentially flat at 9 to 10 per cent following the business-cycle peak of 2001. Thus, the level of slack in the labour market is far higher than that indicated by the standard unemployment rate during the current recession as compared with 2001.
Not only has the US unemployment rate risen faster than during earlier US recessions but US workers unfortunate enough to lose their jobs are remaining unemployed for longer periods of time during this downturn. The mean duration of unemployment has soared to a record high of 29 weeks as against a previous high of 21 weeks in August 1983.
The long-term unemployment rate – or the share of the unemployed who have been out of work for more than 27 weeks – has jumped to an unprecedented 40 per cent compared with a previous high of 26 per cent in 1983.
The economic downturn has not only resulted in massive job losses, it has also reduced hours worked for those who remain in employment. The average work week last month was only marginally higher than the 33 hours recorded in June, the lowest level since the series began in 1964. This suggests that a turnaround in the labour market is some way off. After all, businesses typically work their existing employees longer before they increase their headcount and even then they will usually turn to temporary workers before they employ permanent staff.
Careful analysis demonstrates that the unemployment rate is likely to remain elevated throughout the current economic recovery and subsequent expansion. Indeed, even using optimistic labour market assumptions, the US unemployment rate is unlikely to drop below 6 per cent until 2015 – unless the mass exodus from the labour force continues.
The cumulative blow to workers' income is set to exceed $1 trillion within three years and ensures that the recovery will be decidedly sub-par. Wall Street's vision of a Goldilocksrecovery is a fairytale.
charliefell@sequoia.ie
