Monday, January 07, 2008

Are We In A Recession?

[Graph courtesy of the federal Reserve Bank of St. Louis. Click on the graph, to enlarge it.]

The employment report issued by the Bureau of Labor Statistics (BLS) on Friday sent the stock market down by 250 points. Although employment as measured by firms' payrolls rose, there was virtually no growth over November and the unemployment rate jumped to 5.0 percent (from 4.7 percent.)

Few are saying we are already in a recession, but more are thinking the danger is increasing. Look closer, particularly at the unemployment data: they are a real worry!

There are two separate surveys the BLS uses to gauge the strength of labor markets: the establishment survey and the household survey. For the establishment survey, firms are asked how many employees they have on their rolls. In the household survey, households are contacted and asked who is working and who is looking for work. In recent years cyclical analysts have largely ignored the household survey for two reasons. The month to month noise in the household survey is greater. Secondly, the population controls for the survey from the Census Bureau distorted the time series in the early years of the decade.

Ignoring the household survey is a big mistake. Right now it is giving off strong signals that we are already in a recession.

The unemployment rate has risen from 4.4 percent in March to 5.0 percent in December. Although the drop in November and the jump in December were noise associated with an early Thanksgiving, a decline of six tenths of a percent over nine months is not noise! It is difficult to find a comparable rise that was not part of an economic contraction.

Total unemployed have risen by almost a million (917,000) since March. See the attached graph. Although the population benchmarks through off comparisons in the number of unemployed from one year to the next, they do not affect the measured change from March to December.

A positive note for Wichita's economy, employment in transportation equipment other than cars and trucks continued to rise.

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