Unemployment – the long road to recovery

Following a tiny drop in November payrolls, there was plenty of hype on the Street that December might result in the first decent increase in jobs since December 2007.

Unfortunately, the 85,000 drop in nonfarm payrolls last month dashed hopes that a long-awaited recovery in jobs was about to begin.  Although we saw a small 4,000 increase in November due to revision, the tiny gain was offset by a drop in the previous month.

One thing is for certain, the weak payroll report pushed back expectations for an eventual rate hike by the Federal Reserve and was a start reminder that companies are  still very reluctant to ramp up hiring, even has layoffs ease.

So when might we see meaningful gains in employment? Talk from the White House suggests that we are only a few months away, with rising employment happening by spring.

Robust economic recoveries that followed  the steep recessions of 1974 and 1982 produced impressive job growth; however, the relatively shallow recessions in 1990 and 2001 led to anemic economic recoveries and much slower job growth.

Increases in nonfarm payrolls in excess of 100,000 took 13 months to achieve after the early 1990s recession officially ended (March 1991), according to the Bureau of Labor Statistics.

And hiring was delayed even longer following 2001 slump, with meaningful gains in employment occurring two years after the official end of that recession – November 2001.

A look at the Employment Indices provided by the Institute of Supply Management suggests that any gains in the labor market may be slow to unfold.

As evidenced by the chart below, manufacturing took a huge hit in late 2008 and early 2009 before showing modest signs of strength over the last three months. 

Note: a reading of 50 indicates no gains in employment , while a reading above 50 suggests hiring and a level below 50 is indicative of job losses.

The service sector, which makes up the large bulk of the economy, has exhibited much slower increases, and over the last seven months has held in a narrow range between 40 and 45.

The modest economic recovery so far has produced huge gains in productivity, as companies meet rising demand with continued cost cutting and layoffs.

Looking at how the ISM measures hiring, rising employment may take a back seat to continued caution.

Clearly, the labor market is stabilizing, and recent gains in temporary hiring suggest the foundation for an improvement in the labor market is at hand; however, a slow economic recovery could put a damper on nascent enthusiasm in the job market.