Employment and the recession are worse than the latest data suggest

The latest economic reports were widely misinterpreted, triggering a relief rally in equities. Some observers even unwisely concluded the economy was already on the mend because the unemployment rate edged down to 5.0% in April from 5.1% in March and April nonfarm payrolls declined only 20,000 following an average 80,000 per month decline in the first quarter. Some analysts further mistakenly surmised the economy would escape recession entirely since the initial estimate of first quarter real GDP was up 0.6%, matching the 0.6% fourth quarter rise.

It would not only be premature to draw the conclusion that the recession is or will be mild or brief, it would be wrong. Even at best,the Fed easing and fiscal stimulus could concievably delay the onset of a far more convincing and pronounced economic contraction until after the November elections. Indeed, there should be no doubt that from the point of view of Congressional and Senate incumbents, that would be a very desirable outcome. Pulling out all the stops of monetary and fiscal policy as they have might just pull it off. But, even in that event, it would only delay the inevitable. After monetary and fiscal stimulus has exhausted its impact, housing and other recessionary forces will still be in place to deepen and extend the recession next year.

The realty is that the data below the surface suggest the economy was in recession in April. Whether the income tax rebates are stimulative enough to reverse that for the remainder of the second quarter remains an open question.

It would certainly be a gross error in judgement to take the official United States Department of Labor employment headline report as a realistic measure of the actual April employment situation. The mere 20,000 decline in nonfarm payrolls does not include the 306,000 increase in workers who could not find the full-time jobs they were looking for and were forced by harsh realty to instead accept part-time work in April. This represents a sharp acceleration from the 71,000 average per month increase in workers who were forced to take this part-time work expedient over the past year. If the April increase in unwilling part-time workers were added to the unemployment rate the total would have increased to 5.2% instead of delining. Indeed, if the 5.2 million total of unwilling part-time workers who could not find full-time work are added to the unemployed, the unemployment rate would soar to 8.3%.

As if the forgoing is not enough of a problem with the employment report, there is an even worse error in periods of economic weakness, as now. As I have indicated in prior blogs and elsewhere, the monthly payroll data include an estimate of net hiring by new and small firms that are not sampled. This estimate for April, really a sheer and foolish guess, was a rise of 267,000 jobs. Without this fictional increase, which artificially inflates payrolls, there was actually a steep 287,000 nonfarm payroll plunge in April. The employment situation is not improving. It is deteriorating.

It is an understatement to say the seeming moderation in layoffs suggested by the April 20,000 dip reported in nonfarm payrolls is out of step with other employment reports. This gross disparity is evident in the continuing hefty April layoffs indicated by weekly initial claims for unemployment benefits, which ended the month on a worsening note. Indeed, this worsening is likely to be better reflected in the May employment report. That prospect is reinforced by a startlingly sharp two-thirds increase in April layoffs versus March reported by Challenger Gray and Christmas, the outplacement firm. Also in April the jobs index of the ISM fell to 45.5, the lowest level since May 2003, as companies are turning so cautious they are laying off workers to trim costs even if it means an increase in the backlog of unfilled orders. The job outlook component of the Conference Board's Consumer Confidence index plunged to -23.8% in April,the lowest level in years and a clear indication that the job situation is worsening dramatically.

The April employment report was also inconsistant with the notion of moderating economic weakness in other ways. The April index of aggregate hours worked fell a sharp 0.4% from March. In manufacturing the April drop was 1.2%. If not reversed in subsequent months, such declines typically indicate a decline in real GDP for the quarter. Average weekly earnings in the private sector fell 0.2% in April, a marked departure from the 0.6% increase in March. Considering that these earnings are not adjusted for inflation, in real terms April income plunged, an indicator of consumer financial distress.

The first quarter 0.6% real GDP rise would have been negative if it had not been boosted by unintended and speculative inventory building and panic food and energy purchases by consumers and others fearfull of shortages and still higher prices.

The housing sector is far from bottoming. In the latest report, the S&P/Case-Shiller index of home prices in 20 metropolitan areas was down 12.7% from a year earlier. And ominously, the pace of price decline accelerated in the latest month. Home foreclosure filings more than doubled from a year earlier in the first quarter, puting additional downward pressure on home prices. The economy is not likely to be on the mend until the housing sector has at least hit bottom and beginning to improve. As Warren Buffet quipped referring to the economy it will be a long hard slog.

Philip Braverman, President
Braverman Economic Consulting
One Hewitt Square #249
East Northport New York 11731

philipbraverman@Gmail.com