Thursday, November 12, 2009

For Job Growth to Return, More Hiring Not Necessary

Initial unemployment claims continue to drift lower, declining by 12,000 in the latest week to 502,000- their lowest level since January. Although weekly claims are a notoriously noisy indicator, the "smoother" 4-week average version of the series leaves no doubt about a solid downtrend being underway, which helps cast the underlying dynamic of labor market conditions under a more positive light than the recent headlines that focused on the cycle-high unemployment rate of 10.2%.

The steady downtrend in the claims data since a peak of about 670,000 in the first quarter to around 500,000 currently simply reflects a very significant cooling in layoffs. While the ongoing declines in the monthly nonfarm payroll data are somewhat disappointing, there is a key element that is often not properly recognized in the interpretation of the various labor market indicators as offered in the press.

Source: Bloomberg, Haver Analytics

The emphasis seems to remain recently on the reported reluctance of employers to step up their hiring plans in the near future. As a result, the superficial conclusion that is drawn is that, as long as that pattern persists, we are unlikely to see actual job growth in the monthly payroll figures, This represents a misconception of what the payroll numbers are about, which is essentially the net of the total number of people hired in the course of the month minus the total number of people laid off. Even if, for the argument's sake, the total number of people hired does not increase for a while, if the number of people laid off continues to decline (which is what the initial unemployment claims data are reflecting), then the payroll numbers can still become positive- showing, on the face of it, job growth again. In other words, all we need is for layoffs not to exceed hiring.

With the downtrend in claims seemingly intact, and the monthly payroll declines recently averaging only about 25% of the magnitude of those declines in the first quarter, then we are steadily approaching the point where actual jobs growth will manifest itself in the monthly data- without the need for employers to actually increase their hiring.

Given the recent broader trends in both claims and payrolls, we are probably on track to start seeing positive numbers for the latter series in the first quarter of 2010.

Anthony Karydakis