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Bloomberg.com: Opinion: "It's All Over But the Dating for U.S. Recession: Caroline Baum

Commentary by Caroline Baum

It's All Over But the Dating for U.S. Recession: Caroline Baum

Commentary by Caroline Baum

July 9 (Bloomberg) -- The U.S. economy has been leaking jobs for six straight months, seven if you exclude government hiring.

Granted, it's been a slow leak in terms of the length of time and the magnitude of the losses (an average of 73,000 jobs a month), but there's nothing to suggest an imminent about-face in the labor-market trend.

Initial jobless claims breached the 400,000 mark last week, a level consistent with the onset of past recessions. The Conference Board's Employment Trends Index, an aggregate of eight leading labor market indicators, continued its yearlong descent in June, pointing ``to an even sharper deterioration in the labor market in the months ahead,'' according to the Conference Board.

Taken in conjunction with the decline to 43.8 in the Institute for Supply Management's non-manufacturing employment index, the lowest in its 11-year history, it's hard to be optimistic about employment prospects.

``Labor demand is shrinking, with both the help-wanted index and the net hiring of temporary workers hitting new lows in recent months,'' said Ian Shepherdson, chief economist at High Frequency Economics in Valhalla, New York.

Shepherdson thinks it's only a matter of time until the payroll numbers catch up with labor-market reality.

Then again, reality as we know it could be revised.

The Bureau of Labor Statistics uses something called the birth-death model to estimate new business formation that isn't captured in the monthly survey of existing establishments. The model ``isn't cyclically adjusted,'' said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. ``That will bias upward non-farm payrolls when the economy is slowing.''

Fictional Start-Ups

Just this week, the National Federation of Independent Business reported that its small business optimism index fell to a record low in June, a ``recession level reading,'' according to the survey.

``It's highly unlikely we are seeing new businesses formed, and it's highly likely we are seeing old businesses expiring,'' Kasriel said.

In the past year, for example, the birth-death model estimated an increase in construction jobs (not seasonally adjusted) in every month except November, December and January, and in finance in all months except January. How likely is it that these two battered sectors are seeing lots of start-ups?

``In the 12 months ended June, total non-farm payroll fell an unadjusted 167,000,'' Kasriel said. ``Without the birth-death adjustment, the decline was larger than one million.''

First Among Equals

Why all the focus on employment? It's one of four coincident indicators the National Bureau of Economic Research's Business Cycle Dating Committee (BCDC) looks at when determining the months in which the economy peaks and troughs. Yet employment has always been first among equals.

``The broadest monthly indicator is employment in the entire economy,'' in the committee's own words.

It's easy to see why. Employment is more than a job. It's a means of support -- in most cases, the only one -- and provides a sense of psychological well-being.

News about a decline in employment and a rise in the unemployment rate affects the national psyche in a way that the other three -- industrial production, real personal income less transfer payments and real manufacturing and trade sales --don't. (An individual's income may affect his mood. The monthly statistics on personal income don't.)

Every time employment has declined for four consecutive months or more in the last 60 years, the U.S. economy was either in recession or emerging from one. I doubt this time will be different.

Insufficient Critical Mass

Just think about the current state of affairs. Consumers are trapped between sky-high energy and food prices and increasingly delinquent interest payments on home, auto and credit card loans. Businesses are caught between weak domestic demand and slowing growth in the world's major economies. Financial institutions are clamping down on credit availability, even in the face of cheap credit from the Federal Reserve. Stung by massive losses and writedowns on subprime mortgages, banks are under pressure to raise capital and atone for the errors of their lax-lending ways.

With no prospect for a near-term turnaround in the labor market, the real question becomes, at what point do the employment declines gain the critical mass to warrant the official recession designation?

`Depth Level'

I posed the question to Robert Hall, chairman of the BCDC, in an e-mail this week. After emphasizing that he was ``speaking as an individual member of the committee and not as chair,'' he said the committee ``may reach the question of what depth level constitutes a recession, but we are not there yet.''

The committee may not be there yet, but the economy most likely is. All four of the BCDC's coincident indicators peaked late last year or early this year. The trends in the components aren't likely to reverse anytime soon. So as Hall said, it's only a matter of determining what ``depth level'' will suffice to make the recession official.

What about real gross domestic product, which is still growing? The BCDC uses four monthly indicators because they are a) more timely than quarterly GDP and b) a proxy for it.

Real GDP rose 0.6 percent in the fourth quarter and 1 percent in the first. The meager fourth-quarter increase could turn to mush as early as July 31, when the Bureau of Economic Analysis releases its annual benchmark revisions to the National Income and Product Accounts for the last three years.

A decline in GDP in the fourth quarter wouldn't be the depth charge the BCDC needs to designate an official cycle peak. That comes with a long lag, sometimes after the recession has ended.

It would just be a confirmation for those of us who, to paraphrase economist Robert Solow, see a recession everywhere except in the GDP data.

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.
Last Updated: July 9, 2008 00:00 EDT