7/21/2010
By David Urani, Research Analyst

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At the beginning of this year, there was a general expectation among various economists and the market at large that the second half of this year would see the return of economic growth, particularly employment. However, those employment gains have yet to materialize, with the employment rate essentially remaining stagnant over the past six months at levels in the mid-9% range which is far too high. That being said, there has always been a case for a potentially slow rise in employment, as most market observers tend to agree that employment lags economic recovery. In fact, many are calling for a so called "jobless recovery." We know GDP grew in the first quarter of this year so why isn't employment following suit? Could it be that many of the employees in service now are still ‘expendable", or that we are in fact falling back into the dreaded double-dip?

After charting GDP versus employment (below), one sees quite a discrepancy between the two. How could GDP (in dollar value) be hitting new record highs as employment continues to lag by more than 5% below its peak? At first glance, one would be inclined to believe that those employees were "expendable" considering a record dollar output was achieved with far fewer people.

However, that does not tell the whole story, and is actually misleading. In order to decipher the true underlying trend, we must use "real" GDP, which is inflation adjusted. That chart (pictured below) shows us a more realistic picture in which GDP is still more than 1% below its peak. Nevertheless, the fact remains that employment is lagging GDP but this more muted comparison can be explained by logical factors. Many businesses are simply gearing up for a recovery; take for instance a factory that is producing orders to help customers prep inventories, but is merely increasing previously diminished work hours for its existing employees rather than hiring new people. That effect has been documented by the Bureau of Labor Statistics (BLS) in a rise in "productivity," or output per person.

We indexed the BLS's measures of output (comparable to GDP), productivity and employment so that each measurement equaled 100 at January 2006 and tracked the changes. We replicated that same data for the recession of the 1980's. We actually found a similar trend between the two. As the economy came out of recession in late 1982 and early 1983, employment was trending lower as productivity spiked and output came off a bottom; we are seeing the same pattern this time around, although the pattern has held longer, with employment trending lower than in the 80's and productivity rising even higher. The key difference in our minds, however, is the decreasing employment between April and June of this year. Once employment bottomed in December 1982, it never looked back, whereas we already experienced two straight months of decline this year in May and June after the December bottom.

As we stated before, there have been calls for a "jobless recovery," but an actual decrease in jobs is different than a lag effect. This recession portrays a more troubled economy and at the moment our recovery appears to be lost. It is hard to argue that GDP can continue to increase if employment has fallen back into a downtrend. Although the initial recovery of GDP from recessions tends to be inherently "jobless," the road back to prosperity requires additional manpower. This recovery is looking increasingly derailed.

David Urani
Wall Street Strategies