Thursday, August 5, 2010

Dispelling a Misconception About Payroll Growth

Here's some important historical information regarding the behavior of payroll growth in the past, against which tomorrow's employment report should be evaluated.

One of the most constant complaints about the current economic recovery is that it has failed to generate enough job creation that would inspire greater confidence in the growth trajectory ahead. The hard numbers though question the validity of that perception head-on.

Irrespective of which month precisely the NBER will declare as representing the end of the latest recession, it is a fair expectation to have that it will most likely be the middle of last year (somewhere between June and August). This means that we are already about a year into this economic recovery. In the last six months (January through June 2010), private payroll growth has averaged 100,000 a month, a fairly reasonable pace but clearly below where we would like that number to be when the economic recovery finally reaches the point of operating on all cylinders.

In the first year of economic recovery following the previous two recession, job growth did not fair nearly as well compared to the current situation. In the second six-month period of the first year following the end of 2001 recession, private payrolls averaged approximately -9,000 (compared to the above mentioned 100,000 average monthly gain in the comparable period for the current recovery). Furthermore, if we consider the early phase of the economic recovery that followed the July 1990-March 1991 recession, private payroll growth during the second six-month period of that first year was -27,000.

Private Payroll Growth (monthly, 1982-June 2010)

Source: Bureau of Labor Statistics

Another critical part of that comparison is that, in the economic recoveries that followed both the 1990-91 and 2001 recessions, it took 3 to 4 years for the pace of private payroll growth to reach its peak pace (300,000+ a month in the first case and approximately 200,000+ in the second one) . While it is true that the experience with the labor market dynamic was quite different following the 1981-82 recession, when both the economy and private payroll growth roared ahead in 1983, no one has ever argued that the current economic recovery was meant to be compared with what is arguably one of the most impressive economic recoveries in modern history (that is, the one that followed the 1981-82 recession).

The message here is, that despite the frustration with the unimpressive pace of job creation so far, that pace is far superior to the one associated with the economic recoveries in the last two decades. It is also often missed, in the midst of such frustration, that, often, it does take a period considerably longer than a single year for the machine of job creation to get into full gear following a recession.

Differently put, by historical standards, there is nothing particularly wrong with the pace of employment growth in this recovery.

Anthony Karydakis