Where are the bodies? In line at Unemployment

During yesterday’s discussion with Doc Yardeni, he described an economy with employment so full that we couldn’t possibly hire 200k+ employees each month.

I disagreed. We know the labor force has shrunk considerably, and there are lots of highly qualified able-bodied individuals who would rather not work versus taking a job at a 65% pay cut. We also know it takes 150k merely to keep up with population growth, so a 200k month in a robustly expanding economy should be no big deal.

Paul Kasriel of Northern Trust has a different approach: He suggests looking at the initial jobless claims data. And instead of seasonally adjusting it, he suggests looking at the weekly initial jobless claims data on a year-over-year percent change basis — thus eliminating noise and bias.

The chart below contains such data going back to July 1999. It is complete with outliers related to hurricanes and 9/11. Through the noise, a signal can be detected. Paul observes that "Back in 2004, initial jobless claims were falling around 20% year-over-year. Currently, initial jobless claims are, for all intents and purposes, where they were a year ago. We conclude from this, therefore, that the demand for labor, while still growing, is growing at a much slower pace than it had in recent years."

Unemployment Insurance: Initial Claims, State Programs
% Change – Year to Year                          NSA, Thous
click for larger graph


Source: Northern Trust

Kasriel continues:

"And by the way, the recent behavior of initial jobless claims clears up some ambiguity about the interpretation of the weaker payroll growth of the past three months. Some have hypothesized that the recent weak payroll numbers are a result of a shortage of employable bodies rather than slower demand for those bodies. If that were the case, we would expect that employers would be firing considerably fewer employees now than they were a year ago. In fact, they are firing about the same number each week.

And our best guess is that in the months ahead, the year-over-year percent change in new jobless claims will be trending higher. That’s one of the reasons we expect the FOMC to be cutting the funds rate by December 12 of this year or January 31 of next year."  (emphasis added)

We think that makes lots of sense . .

Weekly Jobless Claims Confirm Softening Labor Market
Paul Kasriel
Northern Trust, August 3, 2006

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What's been said:

Discussions found on the web:
  1. Chief Tomahawk commented on Aug 4

    I suppose Larry won’t invite you back on for a victory lap today?/Yardeni has probably moved up his vacation a day early (afterall, no favorable Household Survey number to trumpet!) But insourcing will save us all, right?

    At what point does the Fed have to raise interest rates to defend the dollar/fight off inflation without regard to the economy? And what will that phoenomena do to the stock market?

  2. KirkH commented on Aug 4

    It’s interesting that in the NY Times piece the jobless men were relying on their home equity to get by. That has to be artificially depressing the unemployment numbers. I imagine there are millions of laid off union employees who made a lot of money and were therefore able to buy homes in the 60s, 70s and 80s. They’re tapping equity that may go away. Only after RE really starts tanking will they show up in the unemployment lines.

    My friend who was a starving San Diego realtor is now in the now booming reverse mortgage business. When the equity runs out in a few years it’s going to get ugly.

  3. KirkH commented on Aug 4

    Yardeni hedged his call with the standard “volatility” and “wait for revisions” lines. He did make some good points though.

  4. Trend Watcher commented on Aug 4

    Great chart. It would be interested to see what this looked like if you stretched it back 10 years so that it covered the period when employment was booming.

    I would also like to see the same chart with some moving average smoothing of the year over year data (maybe 13 weeks).

    The 10 year, 13 week moving average chart of the new claims numbers would provide some further insights.

    And as with the other employment stats, there is much more to the employment picture than can be learned from the headline numbers such as new claims.

  5. David Silb commented on Aug 4


    I’m sorry could you or someone clarify something…

    Your saying unemployment numbers reflect a market of many jobs just not one’s desired by potenial employees?

    And thus, many individuals are foregoing employment in the hopes of better prospects later?

    Or are we in a shrinking labor force and desirable jobs are fewer than in the past?

    I’d just like a little clarification (not attempting to debate or make a point just a little confused as to what your stating tht’s all.)


  6. YH commented on Aug 4

    Both Barry and Ed have some good points (more Barry!). Many employers are leveraged to the promises they made to wall street in terms of earnings. Hence they are reluctant to increase wages. Many positions go wanting because you cannot find qualified people at that rate, in that part of the country. So the market has not caught up. But in most of the country, job growth is low and has been for several years .. outsourcing, off shoring, mergers and productivity gains have hit the average american worker pretty hard. There is simply too much incentive to corporate managers to hire less, work existing employees more and leverage off shoring and outsourcing whenever possible. That is why corporate profits are so high.

  7. KirkH commented on Aug 4

    But corporate profits will only be high until competition kicks in. Which portends deflationary pressures. Barry’s point about the profitability of business software was spot on, wages are probably more impacted by software than off-shoring but it’s easier to blame foriegners than 1s and 0s.

    I work in IT, salaries are outpacing inflation by a pretty big clip because we do things like install open source digital receptionists (Asterisk) which never get hangovers and are always on time, oh and they’re free and will install on an old Dell PC. We get paid good money to put people out of work.

    The jobs that are left are increasingly complex. There is a shortage of good IT people even though the technical colleges crank out diplomas and loans at a feverish pace. You can train people but some just don’t have the problem solving skills to succeed in the IT biz.

    Employees should fear the crafty American IT folk and Open Source software, not the Indians.

  8. Mark commented on Aug 4

    While work returned more than my investments, I worked. Now, I don’t work and pay more attention to my investments. A lot of expenses also went away when I stopped being a “team player” and left them with nineteen mules on their team.

    I did that nine years ago. I’m still here; that company is gone.

  9. Blissex commented on Aug 4

    «Your saying unemployment numbers reflect a market of many jobs just not one’s desired by potenial employees?»

    Yes, but the many jobs pay minimum wage instead of union wage or a middle class salary.

    Many middle class middle aged workers who have been fired are in denial and cannot bring themselves to accept that they are in the underclass now, and they will be (if they are lucky) working at Home Depot or as night guards until they die (unless they somehow got a decent pension waiting for them), and are trying to delay the day they have to admit it to themselves or their friends and wives.

    «And thus, many individuals are foregoing employment in the hopes of better prospects later?»

    That is what they say to themselves, but since most of these people are middle aged and they have no chances.

    However there are some recent graduates that got their degree during the past recession who are waiting for better jobs, but they are not unemployed, they do work (because few recent graduates have assets/savings) already at Home Depot or similar.

    «Or are we in a shrinking labor force and desirable jobs are fewer than in the past?»

    The potential labor force is expanding, skills are improveing, but the number of desirable jobs is shrinking, so there is either underemployment or discouraged job seekers.

    Some links:

    «Uchitelle’s opinion, shared by a growing group of economists, is that, to the contrary, there just aren’t enough well-paying jobs with decent benefits to meet demand.»
    «There’s also the laid-off sixtysomething who strenuously works his alumni network only to net zero job offers, even though he has degrees from Harvard and Wharton.»

    «Getting fired during your peak earning years has always been scary. You’d scramble for a few months, but you’d find something. Today it’s different. Get fired and you can scramble for years–and still find nothing. Welcome to the cold new world of the prematurely, involuntarily retired.»
    «And he sees a lot of people out there like himself, trying desperately to keep up appearances: “You go into upscale suburbs, and what you see is lots of guys with laptops and cellphones, trying to look busy at the Starbucks.”»
    «“It now takes the average laid-off executive more than eight months to find a new position,” we wrote. What’s changed over the intervening 14 years is that discarded executives of a certain age may never find that new position. As Bob Miller has discovered, a great many of those jobs simply aren’t coming back.»

    «Since leaving WatchMark (now called WatchMark-Comnitel), Bronstein, who made $76,500 plus bonus, has been out of work, making ends meet with unemployment and by cashing out her 401(k). With both of those gone, she’s turned to selling her collection of antique women’s compacts on eBay. “It’s the difference between hopeful and hopeless,” she says. “If you’re just laid off, you can tell yourself that the economy swings back and forth, but if it’s outsourced offshore, it ain’t coming back. It still exists, but it just exists in another place. The IT industry in the United States has gone from being a very high-level, well-paying industry to being very low-paying sweatshop labor, and that’s an inexorable trend.”»
    «A 49-year-old former system administrator at Agilent Technologies who worked for the company and its former parent, Hewlett-Packard, for more than 20 years, Null was laid off in January 2002, then was hired for less money as a contract employee to do the same job. When her contract ended last year, Null got the news that her job was moving to Singapore. Although she says Agilent treated her with respect throughout the process, finding a new position in her field has proven impossible. In order to get by and pay her health insurance, which costs some $650 a month for treatment related to a liver transplant, she sold her two cars, cashed out her 401(k), and took on three jobs. One, at Foley’s department store, pays $6.50 an hour; a second, as a real estate saleswoman, depends on commission. She has yet to sell a house. To qualify for benefits, Null has also taken a job as a $12-an-hour call-center operator at T-Mobile. But with call centers one of the most commonly offshored jobs in the country, it’s hardly a secure gig.»
    «“But don’t kid them. My cousin worked as a bartender for eight years while he waited for his $22-an-hour steel mill job to ‘come back.’ These jobs never come back.”»

    So what categories of workers are doing well? I think these:

    * Offshore workers: wages going up between 10-30% a year in China and India.
    * Immigrants: even at $5/h they triple/quadruple their disposable income by moving to the USA.
    * Government employees: safe, stable jobs with very generous benefits, they enjoy lower prices without lower salaries.
    * Ivy League young graduates: in very heavy demand by employers who are desperate to hire only the ”best and brightest” as strategic supervisors working at headquarters.

    If this is true, it projects a clear map of which companies are good investment opportunities.

  10. ari5000 commented on Aug 4

    Did anyone catch that article about a Target that opened up and received 2000 job applications?

    They usually receive 400.

    Quick, somebody build a new Wal-Mart. Everyone can have a job…

  11. Lord commented on Aug 4

    I’m still here; that company is gone.

    I have outlasted many companies. We may hope for something better coming along later, but we don’t plan on it.

  12. jim commented on Aug 5

    I heard it was a Walmart in New Jersey that recieved all those applications. I think there was a similar situation in the Chicago area also.

  13. rockprotect commented on Aug 5

    >> They’re tapping equity that may go away. Only after RE really starts tanking will they show up in the unemployment lines.

    In the US, unemployment insurance only covers people for the first 9 months out of work and only so long as you’ve actively sought work. These folks can’t simply walk up to the unemployment office and start collecting a $200/week check. They’ll have to take a really low-end job.

  14. ~ Nona commented on Aug 5

    Blissex, I think you’re very much on the money. My partner and I are writers with a specialty area of Client (and Customer) Success Stories.

    One dismaying, recurring matter is that after developing great corporate Success Stories, including related web content, brochures, PDFs, etc., the manager who hired us, and remains our contact, suddenly loses his job. OR the group (including “our” manager) is replaced by a PR firm (which charges much more than we do — and must: they have substantial overhead; we don’t). Or…or…or.

    In the “old days” our contacts landed new positions and we frequently continued working for them at their new firms. This has changed. Over the years we’ve made such good friends with some clients that we remain in touch and therefore know what’s happening after they’ve lost their positions. We’re finding that often what’s happening is…nothing.

    There are jobs out there. Occasionally we’ve helped good clients land positions, which is immensely gratifying. More common is this problem: Many suddenly displaced middle managers don’t realize that, in fact, they do have a job, albeit a job they never sought. Their new title and responsibility? Middle Manager Seeking New Position.

    A substantial number of competent, good people are simply ill-prepared and ill-equipped for handling this new position and its associated “responsibilities” (which are relentless and demanding). They become discouraged and demoralized. A few drop out for good.

    While the result of this is that now my partner and I must constantly troll for business (we didn’t really have to before), we feel lucky for two reasons: We’ve built a great track record; our corporate writing skills aren’t readily susceptible to outsourcing.


  15. Blissex commented on Aug 5

    Ahhh, thanks for the comments, and the story by ‘Nona’ is pretty common.

    But it is a bit disappointing that there is no comment yet on this:

    «If this is true, it projects a clear map of which companies are good investment opportunities.»

    in particular because there is a direct relationship from this to why Warren Buffett has done so well over the long term and why probably his strategy is no longer valid.

    However, for those interested in arbitrage and trading (not me!) there might be an interesting angle. Consider this:

    «Uchitelle draws upon mounds of research to show that slashing staff in the name of growth does not, in the long run, lead to better stock performance. Yet CEOs, their thinking warped by Wall Street-induced short-term-itis, continue to hack away.»

    and this:

    «A study published this week by LogicaCMG, an Anglo-Dutch outsourcing firm, says that the shares of British quoted firms, after announcing outsourcing deals, outperformed comparable firms without such a deal by an average of 1.7% in the month after the announcement. Studies in America report even bigger gains.»

    The story here is pretty clear: after the announcement of a downsizing or offshoring stock price goes up, but then goes down, because over time the average is neutral. A bit like for IPOs. It is probably a good tactic then to sell soon after the announcement, taking profit, or else start shorting, companies that do such announcements.

    I wonder if such announcement are timed nicely with respect to option grants and vesting periods :-).

  16. r commented on Aug 6

    Doc Yardeni describing an economy with employment so full that we couldn’t possibly hire 200k+ employees each month sounds like Orwellian bullshit I would expect to hear on FOX news.

  17. Blissex commented on Aug 6

    «At what point does the Fed have to raise interest rates to defend the dollar/fight off inflation without regard to the economy?»

    The scariest aspect of the interest rate situation is that real interest rates are still very, very low (and arguably still negative). Despite this there have been and there are employment difficulties for many, and this is quite worrying, because things could become much worse if there is tightening.

    But I suspect that there is an increasingly weaker link (either way) between real interest rates in the USA and investment in the USA, because many USA companies have an explicit policy of not hiring and not investing in the USA, but only offshore.

    Therefore low or high interest rates in the USA do affect investment and employment positively or negatively, but mostly in India or China; the exception is assets: a very large mount of the free or nearly free money that the Federal Reserve has given to companies and investors has ended up in USA assets, or offshore production, and the effect on both markets has been very, very noticeable.

    Thus this comment is not completely agreeable:

    «Doc Yardeni describing an economy with employment so full that we couldn’t possibly hire 200k+ employees each month sounds like Orwellian bullshit I would expect to hear on FOX news.»

    because Yardeni’s argument is quite true if applied to India or China: in Bangalore and Shenzen the economy, largely thanks to investment from the USA (and Japan) fueled by low interest rates in the USA (and Japan), employment so full that workforce growth is limited by hiring difficulties, resulting in salary increases and employee turnover rates in the 10-30%/y region.

    The USA has been stagnating/deflating despite extraordinarily low real (and for year, nominal) interest rate because it is exporting inflation and growth to India and China, and importing deflation and spare capacity from the same countries.

    So USA companies are doing splendidly well, while the USA economy is not doing so well.

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