Week of July 7, 2008--Will Jobs Market Improve?

Will the jobs market improve this year at all? This could well determine when overall economic activity recovers, not to speak of housing. Consumer spending, the main driver of growth, was up just 1.1 percent in the first quarter 2008, while retail inflation is running at 4.1 percent annually, meaning real spending contracted by more than 3 percent. So consumers have little left over after necessities.

Most pundits continue to say we are not yet in a recession, even though 438,000 payroll jobs have been lost through the first six months of 2008. The unemployment rate held at 5.5 percent in June, as a shrinking labor force cancelled out the job losses in the Labor Department’s Household survey.

Another business indicator is the Conference Board’s Employment Trends Index, which attempts to signal future hiring trends. It has fallen 8 percent since July 2007. “The steep decline of the employment trends index in recent months, and the fact that its weakness is spread throughout all of its components, does not leave much room for optimism,” said its senior economist.

But employment sometimes behaves differently from the more general economic activity as measured by the Gross Domestic Product, according to the Conference Board. But “it has accurately signaled every rise and fall in employment over the last 35 years”.

And that is the key. Economic activity can pick up before jobs. Though the last recession was over in November 2001—yes, that’s just after 9/11 attack—jobs didn’t begin to recover until the second quarter of 2003. This may be a small consolation to consumers, however.

Another key to predicting when the jobs market will improve are the twin manufacturing and service sector surveys put out by the Institute for Supply Management (ISM). Employment in both sectors plunged. What is the culprit? It was surging costs, with prices paid for purchased materials and services increasing for the 61^st consecutive month in the service sector. The rise in prices just from May to June was 7.5 percent.

Housing employment has historically been one of the first job markets to recover after a slowdown, according to UCLA economist Ed Leamer. But the backlog of unsold, vacant homes has to first decline. Harvard’s 2008 Joint Housing Task Force report estimates that there is an 800,000 “overhang” of vacant, for-sale units nationally.

Historically, housing markets usually recover after an economic recession and a mix of falling mortgage rates and dropping home prices. That has been happening of course. But this housing downturn may take longer due to the high volume of foreclosures and the constraints in the credit markets, says the report.

© Harlan Green 2008