Vital Signs: Job Losses Expected to Worsen

On deck: employment report, ISM indexes, construction spending, pending home sales, productivity, and personal income

We know the fourth quarter was bad. Now the data will start to give us an idea of how the first quarter is shaping up. The current betting among economists is: not well. This week offers the first round of major January indicators that will set the tone for what to expect. The Institute for Supply Management’s reports on both manufacturing and nonmanufacturing activity will be key benchmarks, but the Labor Dept.’s employment report is sure to attract the most attention.

The recent acceleration in job losses goes hand-in-hand with the sharp cutbacks companies are making in their capital spending and inventories. Those cuts are shaping up to be major drags on growth in the first half. Further significant inventory reductions will lead to more cutbacks in production and payrolls, especially in manufacturing. Ratios of inventories to sales spiked higher across the board through yearend 2008, with sharp increases from retailers to wholesalers to factories.

One feature of this recession is the severity of the job losses among service-sector companies, which account for more than 80% of private-sector payrolls. Manufacturing and construction jobs always suffer large declines in a recession, but so far those losses are still on a pace with those in past severe downturns. What’s different this time: In the second half of last year, private-sector service payrolls fell at a pace greater than at any time during the severe recessions in 1973-75 and 1981-82. That’s a big reason why payroll losses have been so large in recent months.

January is unlikely to bring any let-up. Job losses averaged more than 500,000 per month during the fourth quarter, and the return to a very high level of initial unemployment claims—555,000 per week through Jan 24—suggest another drop of that size. Moreover, the unemployment rate for insured workers continues to rise, hitting 3.6% in the last week, up from 3.4% in previous weeks. The jump suggests another big increase in the overall unemployment rate, which spiked to 7.2% in December from 6.8% in November.

The steep increase in joblessness over the past year, from 4.9% in December 2007, is raising important questions about just how high the jobless rate will go. Right now, economists are generally betting on a peak rate of about 8.25% to 8.5%. That’s based on an expected 3% or so peak-to-trough drop in real GDP. The concern is that a rate significantly higher than that would fuel conditions for deflation, or a broad decline in prices beyond the downdraft on inflation from falling energy prices.

The fear is that excessive slack in the labor markets could create a self-reinforcing downward spiral between wages and prices. Right now, that’s a small risk—but one that is on the Federal Reserve's radar. After its Jan. 27-28 meeting, the Fed said it saw “some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”

One thing seems certain. As the January employment report is expected to show, the labor markets are sure to get significantly worse before they get better.

Here’s the weekly economic calendar:

Top Economic Reports
Top Reports Date Time For Median Estimate Last Period
Personal Income Monday, Feb. 2 8:30 a.m. December -0.2% -0.2%
Personal Consumption Expenditures Monday, Feb. 2 8:30 a.m. December -0.8% -0.6%
ISM Index (Manufacturing) Monday, Feb. 2 10:00 a.m. January 32.5 32.9
Construction Spending Monday, Feb. 2 10:00 a.m. December -0.9% -0.6%
Domestic Auto Sales (Millions) Tuesday, Feb. 3 afternoon January 3.5 3.6
Domestic Light Truck Sales (Millions) Tuesday, Feb. 3 afternoon January 4.1 4.1
ISM Index (Nonmanufacturing) Wednesday, Feb. 4 10:00 a.m. January 39.5 40.1
Nonfarm Productivity (Preliminary) Thursday, Feb. 5 8:30 a.m. Q4 0.5% 1.3%
Unit Labor Costs (Preliminary) Thursday, Feb. 5 8:30 a.m. Q4 3.3% 2.8%
Factory Orders Thursday, Feb. 5 10:00 a.m. December -2.3% -4.6%
Nonfarm Payrolls (Thousands) Friday, Feb. 6 8:30 a.m. January -500 -524
Manufacturing Payrolls (Thousands) Friday, Feb. 6 8:30 a.m. January -118 -149
Unemployment Rate Friday, Feb. 6 8:30 a.m. January 7.4% 7.2%
Average Hourly Earnings Friday, Feb. 6 8:30 a.m. January 0.2% 0.3%
Average Weekly Hours Worked Friday, Feb. 6 8:30 a.m. January 33.3 33.3
Consumer Credit ($Billions) Friday, Feb. 6 3:00 p.m. December -$2.3 -$7.9
Other reports and events
Reports/ Events Date Time For
ICSC-UBS Store Sales Tuesday, Feb. 3 7:45 a.m. Jan. 25-31
Johnson Redbook Weekly Store Sales Tuesday, Feb. 3 8:55 a.m. Jan. 25-31
Pending Home Sales Tuesday, Feb. 3 10:00 a.m. December
Housing Vacancies Tuesday, Feb. 3 10:00 a.m. Q4
Mortgage Applications Wednesday, Feb. 4 7:00 a.m. Jan. 25-31
Initial Unemployment Claims Thursday, Feb. 5 8:30 a.m. Jan. 25-31
SPEECH: Philadelphia Fed President Plosser Thursday, Feb. 5 8:30 a.m.
SPEECH: St. Louis Fed President Bullard Thursday, Feb. 5 1:00 p.m.
SPEECH: San Francisco Fed President Yellen Friday, Feb. 6 5:45 p.m.
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