Business Ahead of the Curve, But…Have Job Losses Become a Leading Indicator

July 11, 2009

I received the following email from a well-known, astute businssman and friend.  I have chosen to protect his anonymity.

I thought that both his major point and my reply might be of interest.  It won’t take much of an upturn in volume to produce some stunning profits.

Is it possible that job losses, normally a lagging indicator, are sufficiently severe to have transformed them into leading indicators, at least in the short run?



I enjoy your “musings”. I wonder if your recent comment about the weak employment situation could not also be seen in a different light.

My reading is that consumption is down “somewhat’…2.2% or so.

Business has pulled back strongly as seen by the unemployment figures and domestic investment which is down by 15% plus housing by 50%.

Wages as well as Disposable Income have held up despite employment.

This says to me that business is out ahead of the problem which may be good.

What do you think?

Regards,  J——


Dear J—-,

You are certainly correct.  Business has been ahead of the curve in cutting employment and so far profits have behaved better than I would have expected, given the magnitude of the contraction.  The productivity numbers also indicate this.  When volume recovers the earnings results could be stunning.

My concern has been that employment has been falling so fast that, at least in the near term, its usual “lagging indicator” status might not hold, becoming more of a leading or at least a coincident indicator.  I think that has been more or less the case until now.  What I am anxious to see are signs that job losses are slowing.  The May numbers seemed to indicate that but the June report gave no such evidence.  One possibly hopeful sign is that last week’s initial unemployment claims declined, and now are down over 90,000 from the peak.  Initial claims ran over 600,000 for 22 consecutive weeks!  However, now we have simply returned to the January level, which we thought was horrendous at the time. July’s employment change may look better than June…but it’s still likely to be bad, only less so.

In the meantime, consumption is being supported by significantly lower taxes and unemployment benefits, and penalized by higher fuel prices (after benefiting greatly from lower fuel prices in the 1st quarter).  Disposable Income has held up pretty well, but I don’t foresee any real improvement for quite a while.

Inventories have been reduced big time, and any initial improvement in GDP will be largely the result of and heavily affected by what happens to inventories.  If inventory liquidation were simply to cease, GDP would jump by 2%.

Hope your summer weather has been better than ours.  New Hampshire’s  June was the second cloudiest  of the past 100, exceeded only by 1903!

Best Regards,   Paul

A Withered Green Shoot…..Employment Down for 18th Consecututive Month

July 3, 2009

If you needed any convincing that The Great Recession was still receding you got it Thursday morning. The employment report was significantly worse than expectations. June was the 18th consecutive month of net declines of nonfarm payroll employment.  It was the 10th consecutive month to record a decline of over 300 thousand jobs.

After  employment losses moderated in May, and after weekly initial unemployment claims seemed to stabilize, hopes were raised in recent weeks that the labor market was seeing some “green shoots”.  This now appears to have been a premature judgement, at least in reference to the job market.

In every industry except health care the job losses were higher in June than in May; a total of 467 thousand compared to an average expectation of about 350 thousand.  The unemployment rate continued its rise and is now at 9.5%.

Hours worked dropped to 33 from 33.1, the lowest level since data have been kept. Clearly some employers are reducing the hours worked instead of making further layoffs. Dave Rosenberg, the former Merrill Lynch economist who is now with Gluskin Sheff, a Toronto-based money management firm, calculates that to match June production while using the same hours worked as in May would have meant job losses of about 800,000!

Further, the diffusion index fell from 31 to 28.6, meaning that only 28.6% of the employers covered by the survey did any hiring.

The average duration of unemployment jumped to 24.5 weeks from 22.5. Both the size of the increase and the level set new records.

The Bureau of Labor Statistics also reports the number of people who are neither currently working nor looking for work , but say they want a job, and people who are employed part-time because that’s all they can get (officially called the U-6 unemployment report). This group now totals a whopping 16.5% of the workforce, having edged up from 16% reached in February.

To expect any significant improvement in consumer spending with this kind of headwind is wishful thinking.