Insights & Advice


November Surprise

Saturday, December 5, 2009


•    The decline in job losses nearly stalled last month.

•    The details of the November labor report exhibited positive signs portending good near term news, although improvement will not be


•     While signs of a 2001-like jobless recovery (where job losses persisted for 21 months after the recession’s end) are diminishing,

      the unemployment rate won’t reach pre-recession levels this decade.

On Friday the Bureau of Labor Statistics released their monthly report on the employment situation and they gave us a welcome surprise for the labor market in November.

Of course, in this very weak economy all things are relative. The consensus estimate for job losses last month was 125,000. Instead we were pleasantly presented with a loss of “only” 11,000. Moreover, the unemployment rate dropped from 10.2% to 10.0%. Also in the category of relative good news, the job losses for September and October were revised to the tune of adding 159,000 jobs to the reports (but don’t get to excited – the revised numbers still saw a loss of 250,000 jobs for those two months).

While this was a notable improvement, and while the tone of this “November Surprise” article is optimistic, it needs to be clearly stated that in past cycles, the ends of labor market downturns evolved gradually with improvements followed by setbacks. Setback should be expected in the months to come.

Still, let’s take a moment to enjoy the good news found in this report before we dampen the optimism with some caveats. The improvement in the employment situation was broad based. A most encouraging area of growth was a net addition of 52,000 jobs in temp services in November, the fourth consecutive month of growth in this segment (and the biggest rise in over ten years). Looking back at the “jobless recovery” of 2001, temp help began to increase about six months before overall payrolls turned around. An overly simple extrapolation of that one data point would put net job growth on the calendar for early 2010.

Also encouraging was that the average workweek increased from 33.2 hours, from a record low 33 hours in the prior month. That doesn’t sound like much, but there are two points to consider. First, the number moved in the right direction. Second, the rise in the workweek hours is roughly the equivalent of creating another 900,000 jobs (150 million employed Americans x 0.2 hours = 30 million extra hours per week; 30 million hours / average workweek of 33 hours = 909,090 equivalent jobs).

This is all very encouraging news, but we did promise you caveats. This report does not dispel longer-term concerns. Instead of parsing the details of the labor force participation rate or ratios such as the percentage of permanent job losers to the total number of unemployed (both being party-poopers in their own right), let’s just talk about where new jobs will not be coming from as we believe this helps illustrate why it will take so long (i.e. years) to get back to full employment.

But first, some perspective. In the next couple of paragraphs, when we talk about where job growth won’t be, we aren’t talking about non-existent job growth. There will be some job growth in all sectors. Businesses simply cut far too many jobs in this recession and as demand increases and as inventory levels need to be replenished, jobs will have to be filled. When we talk about where job growth won’t be, we are talking about not getting back to previous levels for years and years (if ever).

Take into consideration that since World War II the annual pace of decline in the unemployment rate coming from recession and into, and through, economic expansion has been a consistent 0.5%. If that pattern were to persist, the economy would need to expand without interruption until the year 2020 for unemployment to fall back to its pre-recession low of 4.4%.

There won’t be jobs in manufacturing; these jobs have been in a secular decline since 1979.

There won’t be jobs in the financial and banking industries; profits have been ratcheted back to seemingly the dark ages. And with new regulation and newfound religion regarding leverage, growth will not be what it once was.

And there will not be job in housing-related activities; the housing market went through a bubble and that bubble won’t be getting reinflated any time soon. During the last expansion, housing-related industries accounted for nearly twenty percent of all net jobs created. It will be difficult to find a new sector to account for that type of US jobs growth.

So where will the job growth be in the U.S.? Our bets are on continued growth in health care to service the aging baby boom population. Also, based on projections from the Labor Department, look toward professional and business services, education, social assistance, and technology.

Bottom Line: November 2009 marked the 23rd straight decline in US payrolls. We are still at the point where any cause for celebration is only relative to prior months. In that regard, jobless numbers have improved markedly over the last year or so. Additionally, there are now signs of future near-term improvement, even if that line of improvement may be jagged.

High-probability forecasting for the labor markets is non-existent at this point, and that includes both positive and negative outcomes. As such, the prospects of a 2001-like jobless recovery are far from certain. This latest employment report diminishes that certainty.

The one exception to high-probability forecasting for the labor markets is that the US unemployment rate will not be reduced to pre-recession levels in any manner of time that could even remotely be considered soon.