Jobs May Take a Smaller Hit This Time
The March employment report was generally expected to be consistent with early-recession patterns seen in the past. Sure enough, no surprises: The unemployment rate spiked from 4.8% to 5.1%. Payrolls dropped by 80,000 workers, with January and February jobs revised down by a total of 67,000. And private-sector employment has shrunk for four months in a row. From this point on, if history is any guide, it only gets worse. Even in the past two mild recessions, each of which lasted only eight months, payrolls went on to post monthly losses exceeding 200,000, and the unemployment rate topped out 2.5 percentage points above its low point. That script would put this downturn's peak jobless rate near 7%.
This time, however, history may not be such a good guide. There is no denying that labor market weakness will likely intensify in the coming months, especially during the second quarter. That's when economic growth will come under perhaps the most intense stress of the year, due to both retreating consumer demand and cutbacks in business capital spending. However, several factors unique to this business cycle will help to ease the pain, and the massive fiscal and monetary stimulus in the pipeline is only part of the story.
Conservative Hiring and Firing
Start with unusually conservative hiring over the six years since the last recession. Private-sector firms added only 80,000 workers per month, on average, by far the slowest pace of job growth in any of the 11 post-recession periods since World War II. That means businesses entered the current slump with very lean payrolls and, as a result, fewer need to lay workers off.
Recently, companies have been slow to hire—but slow to lay workers off as well. Since the market turmoil began last summer, Labor Dept. data (through February) show job openings have fallen almost exclusively because of a slower hiring rate. The rate of separations has been unchanged. Layoffs are part of any recession, but so far companies are making a strong effort to retain workers.
Good News for Older Workers
Demographics may have a lot to do with it. Over the past decade, the proportion of much coveted workers aged 55 and over has soared from 12% to 18%, based on the Labor Dept.'s household survey. Since January, 2007, jobs held by these workers have increased by 1.5 million, while jobs held by all other age groups have fallen by 1.5 million. In the past, jobs for workers under 55 started to drop close to the start of a recession, never a full year before.
That means businesses already have been making significant adjustments to their payrolls. Jobs for workers 55 and older continued to grow strongly during the 2001 recession, and that pattern should hold in the current downturn, given companies' apparent desire to hold on to their most experienced and productive employees.
The atypical, housing-led nature of the current slump is also a factor. Payroll adjustments in housing-related jobs in construction and certain manufacturing and service industries have been going on for two years and are well advanced. Losses there now total about 700,000.
Job weakness has broadened beyond housing in recent months, but losses are still concentrated in housing-related areas. In the past four months these sectors have accounted for 70% of the 300,000 drop in private-sector jobs. If the slump in housing activity bottoms out in the second half, as is widely expected, a big drag on payrolls will begin to lift.
Until then, further overall job losses will cut consumer income at a time when households are already reeling from costlier energy, falling home prices, and tighter credit. Last quarter, labor income fell far behind inflation. This quarter, some $100 billion in tax rebates will provide one of the largest quarterly lifts to aftertax income on record. Those checks will be the leading edge of more stimulus from the Fed's rate cuts and government agencies moving to support housing. Labor markets are sure to get worse before they get better, but to the extent policy efforts buoy the economy, they will also limit job-market weakness.