October 2008 Employment Report: Deep Economic Woes Will Take Long To Fade
Civilian Unemployment Rate: 6.5% in October vs. 6.1% September, cycle low is 4.4% in March 2007.
Payroll Employment: -240,000 in October vs. -284,000 in September, net loss of 179,000 jobs after revisions of payroll estimates for August and September; private sector payrolls fell 263,000 in October vs. a loss of 243,000 in September.
Hourly earnings: +4 cents to $18.21, 3.5% yoy change vs. 3.4% yoy change in September; cycle high is 4.28% yoy change in Dec. 2006.
Household Survey – The civilian unemployment rate rose to 6.5% in October from 6.1% in September. The jobless rate now is the highest since March 1994 (see chart 1). The cycle low for the unemployment rate was 4.4% in March 2007. A broader measure of unemployment, which includes marginally attached workers and part-time employment for economic reasons, rose to 11.8% (see chart 1) in October, matching the high of January 1994. The number of persons who worked part-time for economic reasons rose by 645,000 to 6.7 million, putting the increase in the past twelve months at 2.3 million (see chart 2).
The percentage of unemployed "not on temporary layoff" (see chart 3) -- 43.3% -- is at a cycle high. The October reading is already close to the high mark of the 2001 recession (43.6%), implying a high probability of a new cycle high for this indicator because the trough of the business cycle is not here yet.
Establishment Survey – Nonfarm payrolls declined 240,000 in October following a 284,000 drop in September. Revisions of estimates for August and September show an additional loss of 179,000 jobs. Year-to-date 1.18 million jobs have been lost. During October, payroll declines continued in manufacturing (-90,000), construction (-49,000), and several service sectors. Of the 90,000 job losses in the factory sector, about 27,000 aero-space workers were on strike at the time of the survey and have now resumed work. In the service sector, 38,000 retail jobs were lost, with auto dealers accounting for 20,000 of the decline. The financial sector posted a loss of 24,000 jobs, while health care continued to expand in October (+26,000).
Hourly earnings increased 4 cents to $18.21, putting the year-to-year gain at 3.5%. The drop in employment offsets the gain in earnings such that personal income in October is most likely to have held steady.
The manufacturing man-hours index fell 1.0% in October, after a 1.3% drop in September, which suggests a noticeable drop in industrial production. The one-month diffusion index for private sector payrolls dropped to 37.6%, the lowest since February 2002. The details from the household and establishment survey indicate a significantly weak labor market that is unlikely to mend soon.
Conclusion – At this point in the economic crisis, the severity of the malaise points to expectations of a lower federal funds rate, which the Fed may deliver sooner rather than later. On October 15, 2002, Governor Bernanke presented a framework for Fed policy regarding asset-market instability. His remarks are appropriate (see excerpt below, FRB Speech, Bernanke -- Asset-price "bubbles" and monetary policy -- October 15, 2002) and the Fed has executed its responsibility of lender-of-last resort in a fitting manner.
"The second part of my prescription is for the Fed to use its regulatory, supervisory, and lender-of-last-resort powers to protect and defend the financial system. In particular, alone and in concert with other agencies, the Fed should ensure that financial institutions and markets are well prepared for the contingency of a large shock to asset prices. The Fed and other regulators should insist that banks be well capitalized and well diversified and that they stress-test their portfolios against a wide range of scenarios. The Fed can also contribute to reducing the probability of boom-and-bust cycles occurring in the first place, by supporting such objectives as more-transparent accounting and disclosure practices and working to improve the financial literacy and competence of investors.3 Finally, if a sudden correction in asset prices does occur, the Fed's first responsibility is to do its part to ensure the integrity of the financial infrastructure--in particular, the payments system and the systems for settling trades of securities and other financial instruments. If necessary, the Fed should provide ample liquidity until the immediate crisis has passed."
We need to step back and ponder about the benefit of additional easing of monetary policy. There are strong expectations that a significant stimulus program will be implemented shortly. A fiscal stimulus program may be more effective in stimulating demand and bringing about a recovery than additional easing of monetary policy. Also, the recapitalization of banks, that is underway, should eventually erase the credit crunch and revitalize lending to the private sector, which is the key to a full-fledged economic recovery. These factors support considerations of watching rather than acting immediately.
