How Long Before Jobs Recover In The U.S.?

Friday morning the employment report for May will come out, and there is no doubt that it will show the economy continued to shed jobs. The consensus expectation is for a loss of 520,000 jobs - on top of the 539,000 lost in April and the almost 6 million lost since the downturn started. While I am not one of those that thinks that there is no such thing as a Government job, I do think that changes in private employment are a better measure of the health of the economy.

The last two recessions behaved significantly differently from previous downturns with respect to private employment. In earlier downturns, the economy stopped losing jobs almost as soon as the economy started to recover, and the number of months of falling employment was very close to the length of the recession.

In some of those downturns, the economy was still able to add jobs even after the recession had started. The most notable example of this was the mid 1970’s recession, which started in November 1973, but the economy added private jobs until June of 1974. The unemployment rate was going up during that period, but that was because the workforce was expanding faster than the number of jobs, not because jobs were actually being lost.

In the last two downturns, the job losses continued long after the recession was officially over. The last recession officially lasted only 8 months, but employment fell for 22 months (it actually started to decline in December 2000, even though the recession didn’t start until March 2001). Indeed more than 40% of the total jobs lost during that downturn were actually lost after the recession was officially over.

The 1990 recession was similar but not quite as extreme. It also officially lasted 8 months, but had 19 down months of employment, and almost 30% of the jobs lost were after it was over. This is in very distinct contrast to all the earlier recessions, where all the losses occurred during the recession.

It is also important to note that the end of a recession, or even the end of falling employment, does not mean that everything is going well. It takes time to recover from the losses. In the 1990 downturn, the official end was in March 1991, and we did not get to July 1990 employment levels until April 1993, more than two years past the end of the recession - but still about a year past the end of the employment declines.

The 2001 recession was even worse. It officially ended in November 2001, but jobs continued to be lost until July of 2003. We did not get back to March 2001 employment levels until May 2005, almost two full years after the low point of employment, and three and a half years after the recession officially came to an end.

This time around, we have already been losing jobs for more consecutive months than any previous downturn at 17, and with 18 pretty much in the bag for tomorrow morning. The slight decline in initial unemployment claims we have seen over the last two months might be signaling that the NBER will date the end of this recession at some point around now (they will not get around to it for at least another six months, they wait for all the revisions to be in and tend to be sort of slow about making these decisions, it took them almost a year to decide we were in a recession, after all).

However, it seems very likely that the economy will continue to lose jobs for quite awhile, most likely until at least the middle of next year. As for getting back above the previous peak employment level of 115.78 million jobs, we will be lucky if we get to that level by the end of 2012.

This recession was caused by balance sheets being out of whack, not inventories. This means it should take much longer to recover. The savings rate has risen substantially in recent months (now at 5.7%), but it still has further to go up and will have to stay high for a very long time for consumer balance sheets to be repaired.

It is hard to increase your savings if you have had your pay cut, your hours cut, or if one or both spouses in the household have been laid off. In such an environment, look for companies that provide goods and services that are absolutely essential, and which cannot be put off. A company like Johnson & Johnson (JNJ: 55.84 0.00 0.00%) is a good example. Avoid companies that depend on frivolous spending. Casinos like Wynn Resorts (WYNN: 40.60 +1.09 +2.76%) and Las Vegas Sands (LVS: 10.18 0.00 0.00%) would be a good example of what to avoid.