Since 2008 I have been stating the US would have “Structurally High Unemployment for a Decade“.
Indeed, based on historical trends in labor force growth, the expected unemployment rate for the number of jobs created during the recovery would be well north of 11%. Yet, the unemployment rate is currently an artificially “low” 8.5% (not that 8.5% is anything to brag about).
To show how difficult it will be to bring that rate down, let’s take a look at job growth (or losses), for the last three decades (numbers in thousands).
1970′s Job Growth
YearJanFebMarAprMayJunJulAugSepOctNovDecAvg1970-64126151-105-226-9427-12317-430-110381 -38197176-61541782106635225222202264 1101972337207293218304293-51428131404293305 264197335039726917019024025255115324304126 23019746914942891635532-15-513-368-602 -321975-360-378-270-186160-10424938678303144338 301976489311232244186517015818813332211 2031977244295404339359399348238458262379235 3301978187353513702346442254276137336437283 3561979137243426-6237231810682271579495 166Decade Annual Avg162
1980′s Job Growth
YearJanFebMarAprMayJunJulAugSepOctNovDecAvg198013179112-145-431-320-263260113280256195 22198195671047410196112-36-87-100-209-278 -41982-327-6-129-281-45-243-343-158-181-277-124-14 -1771983225-78173276277378418-3081114271352356 2881984447479275363308379312241311286349127 3231985266124346195274145189193204187209168 208198612310793188125-93318113346187186204 1581987171232249338227171346170229492231294 263198894452276245227363223121340268339289 2701989262258192173118117394724911127795 162Decade Annual Average151
1990′s Job Growth
YearJanFebMarAprMayJunJulAugSepOctNovDecAvg19903422452154014917-42-208-82-161-144-60 261991-119-306-160-211-12887-47153512-5823 -71199249-6650158126607114135177140211 961993310242-51309265173295161241277261308 2331994268201462353331315363300354207423274 3211995321209222162-1623179271245147148131 1791996-19434263161323278232196220243296167 2331997230301312291256253283-18508339303299 2801998270189144277401212119352218193284342 2501999121410106376213266291192202408294294 264Decade Annual Avg180
2000′s Job Losses!
YearJanFebMarAprMayJunJulAugSepOctNovDecAvg2000249121472286225-461633122-11231138 1632001-1661-30-281-44-128-125-160-244-325-292-178 -1472002-132-147-24-85-745-97-16-551268-156 -45200383-158-212-49-6-225-4210320318124 7200415043338250310814712116035164132 17120051362401423601692463691956384334158 20820062813172871821180202185156-8205180 1732007203882187914167-49-26699112784 91200813-83-72-185-233-178-231-267-434-509-802-619 -3002009-820-726-796-660-386-502-300-231-236-221-55-130 -422Decade Annual Avg-10
2010′s Job Growth
YearJanFebMarAprMayJunJulAugSepOctNovDecAvg2010-39-35192277458-192-49-59-2917193152 782011682351942175320127104210112100*200* 136* : preliminary108
Bear in mind those tables are from the BLS establishment survey data while the unemployment rate is based off a phone survey. Nonetheless, with sufficient time (and BLS revisions), the results merge.
According to Fed chairman Ben Bernanke (and I believe he is correct on this point) it currently takes about 125,000 jobs a month to hold the unemployment rate steady, down from about 150,000 in 2000. I expect that number to drop for a few more years due to boomer demographics, but the key point is the number is positive not negative.
The only reason unemployment rate has dropped recently is because BLS surveys say the number is negative (a shrinking labor force).
Based on historical data and Bernanke’s estimates, one would have expected the unemployment rate to have risen during 2010 and peaked mid-2011. Instead, the unemployment rate fell from 10 to 8.5.
The Real Employment Situation
With that backdrop on historical job trends, please consider an excellent article by Lance Roberts of Streettalk Live: The Real Employment Situation Report For December 2011
If you take a look at the actual number of those “counted” as employed, that number has risen from the recessionary trough. However, in reality, employment is still far below the long term historical trend. Currently, the deviation from the long term trend is the widest on record and has made very little improvement.
In order for the country to return to the long-term trend of employment by 2020, we will need to be creating nearly 250,000 jobs each month. This, of course, is a far cry from 200,000 that we saw this month. With the employment-to-population ratio remaining at levels not seen since 1984, the real pressure on the economy remains focused on the consumer.
There are two very negative ramifications of this large and “available” labor pool. The first is that the longer an individual remains unemployed, the more the degradation in job skills weighs on future employment potential and income. The second, and most importantly, is that, with a high level of competition for existing jobs, wages remain under significant downward pressure.
Business owners are highly aware of the employment and business climate, and regardless of the ranting and raving about the “cash on the sidelines”, businesses are not operated as charities. Business owners are milking the current employment climate for all it is worth in order to maintain profitability. With high competition levels for existing jobs, and the impeding threat of job loss for those working, employers can work employees longer hours at less pay. This is great for profit margins, and workers won’t complain because there are plenty of individuals that will be happy to take their job and do it for less pay.
This impact on wages, as other inflationary pressures rise, hits the consumer where it hurts the most. We have discussed the fact that recent declines in wages and salaries combined with the rising costs of food and energy are consuming more of the household income. This bleed on incomes has led to significant slides in the personal savings rate and the ability for the consumer to continue to spend outside of the main necessities to meet their basic standard of living. This pattern is unsustainable, and sharp decreases in personal savings rates have historically been precursors to the onset of recessions.
Employment Trends Since 1955
In Employment Trends Since 1955 I posted a chart from reader Tim Wallace that conveys the same idea in a different way.
Wallace writes ….
On today’s labor report: Note how the labor force has flat lined for four years even though population growth has averaged 1.5 million for the past 55 years. From 1993 to 2007 population growth was 1.7 million per year!
Thus, the labor force should not suddenly turn flat since retirements do not even come close to explaining the chart. Yet, suddenly the work force has just been frozen in time although the population continues on the same upward trend.
The work force is literally one million smaller than during Bush’s last year in office. This is statistically impossible, at least judging from historic trends.
We also are still 5.6 million people below the employment number of the peak year in 2007. So, practically speaking we have approximately 11.6 million more people unemployed than in 2007.
If we add the additional 6 million that should be counted as available for the labor force, the unemployment number at the U-3 level surges past 11% as you have said numerous times.
Shrinking Job Opportunities and the Jobs Gap
Let’s look at the same data still one more way.
The December Jobs Gap
As of December, our nation continues to face a “jobs gap” of 12.1 million jobs, down by 67,000 jobs from November.
The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions for job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.
If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until March 2024—over 12 years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by February 2017—not for another five years.
Statistically Impossible IFs.
Based on the data tables from the BLS that I posted at the top of this article, each of those dashed line in the above chart represents a statistically impossible IF.
The economy is certainly not going to average 472,000 jobs per month for two years. Nor will it add 321,000 jobs a month for six straight years. Finally, the economy is not going to add 208,000 jobs a month, every month, for the next 12 years.
Indeed, one cannot find any 10-year period in which the economy added that number of jobs. The best 10-year period I can find is 195,000 jobs per month from 1991-2000, overlapping decades by 1 year (during the internet boom with hugely falling interest rates and Greenspan’s foot on the gas pedal nearly every step of the way).
Fundamental Case for Structurally High Unemployment
- At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.
- At the height of the housing bubble in 2005, the economy added 208,000 jobs a month.
- At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 91,000 and 173,000 jobs per month depending on where you mark the peak.
Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution.
Moreover, debt levels are high and millions are trapped in their homes, unable to move. Boomers in retirement or headed for retirement have insufficient savings so one cannot expect a spending boom of any kind. Instead, one can expect boomers to draw down on their savings (assuming that have any savings).
In conclusion, the only way the unemployment rate can substantially decline from here is if millions more drop out of the labor force, thereby creating an even bigger “gap” between reality and the BLS’s alleged unemployment rate.
Mike “Mish” Shedlock
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Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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