Following the fiscal and monetary stimulus that pulled the U.S. economy out of recession in the third quarter (but the growth rate, +2.8%, was lower than the previous estimate of +3.5%), economists now almost unanimously agree that the labour market upturn will be key to ensuring a continuation of the ongoing recovery into the months ahead. This is in tune with the Fed’s thinking, as indicated in the minutes of the November 3-4 FOMC meeting. Indeed, only better employment conditions will likely translate into a sharp upswing in private consumption, which account for 70% of GDP. By contrast, a persistently negative labour market environment would likely trigger a further increase in foreclosures, which would weaken further private consumption and increase the savings rate.
Not surprisingly, this week’s major macroeconomic data release will be the publication of the November’s U.S. labour market report on Friday 4.
Encouraging signs on the labour market trend came last week from initial jobless claims, down from 501,000 for the week ending November 21 to 466,000. The four-week moving average, which traditionally smoothes out weekly volatility, dropped to 496,000 from 513,000 the previous week. Although the figure remains far from levels usually associated with job-creation, it gives clear evidence of a turnaround that could mark the beginning of unemployment downtrend in the medium term.
Another positive signal on the labour market outlook was the increase above 50 of the employment sub index in the ISM manufacturing confidence Index. Indeed, the data showed that an increasingly larger number of companies are considering returning to hire in the coming months.
Nevertheless, consumers appear to be less optimistic about employment prospects. The “jobs hard to get” sub-index included into the Conference Board’s consumer confidence index, a good leading indicator of unemployment trend, has worsened further in November, up from 49.4 to 49.8. Therefore, consumers do not expect a sharp labour market upturn near term but they fear it will deteriorate further.
As regards the November figure, though a further drop in non-farm payrolls seems to be inevitable, a continuation of the recent improvement in employment conditions, with job losses shrinking below 150,000 units (vs. Bloomberg’s consensus estimate of 125,000) from 190,000 in October and the unemployment rate on hold at slightly above 10%, would be welcome news.
However, the labour market (and a consequent net creation of jobs) should not turn the corner any time soon despite the strong increase in corporate productivity and profit margins in the third quarter of this year. Before returning to hire companies will likely raise the number of hours worked by existing staff and transform the contracts of those employees who have accepted a reduction in the hours of work not to lose their post from part-time into full-time work. According to the latest data by the U.S. Bureau of Labor Statistics, in fact, the average hours worked per week have decreased from 33.8 pre-recession to 33 and 9.3 million part-time workers are longing for a full-time contract.
A rapid and sustained improvement in the labour market has also being hindered by capacity utilization in recent months. The chart below shows that the labour market has deteriorated less than anticipated by the collapse in capacity utilization to 68.3% - the lowest level in the past 40 years. For example, at the time of the December 1982 record low of 70.9%, the unemployment rate climbed to 10.8%, well above the present value. With capacity utilization at 70.7% in November, a further improvement in this data, which is obviously closely correlated with the economic cycle, is necessary to record lower unemployment rates.
On the other hand, even in the face of a continuation of the upturn in economic activity throughout 2010, unemployment conditions would take time to get better. Indeed, the jobs to be created for new entrants to the labour force (about 100,000 per month) should be added to the jobs needed for those who have lost them in the past two years (over 7 million).
The November FOMC meeting minutes, for example, showed that the Fed members’ average estimate is for a decline in the unemployment rate to 9.5% in late 2010. With a projected workforce increase of 1% in 2010 (to 155 million), the Fed’s central estimate implies a creation of some 2.5 million jobs over the next 14 months. A considerable advance - though certainly not enough to recover the ground lost in the past two years. Under this scenario, the recession that began in December 2007 would have ended well before the third quarter of this year, which is highly unlikely given the recent development in industrial production and household income. The unemployment rate continued to rise during the 14 months subsequent to the end of each of the last two recessions. Considering the last six recessions, the unemployment was either in line or exceeded the Fed’s predictions only in two cases (in 1975 and 1982). The Fed’s forecast of a 9.5% unemployment rate at end-2010 could therefore prove to be overly optimistic.
All in all, the November labour market data should provide two key indications. First, the worst for the U.S. economy, and ultimately for the labour market, should be over. Second, the recovery should be very slow and the fallout from the crisis should be felt for several years. According to leading U.S. newspapers, President Obama is understood to be under increasing pressure to implement new programmes to ease labour market conditions.