How Important Was The October Jobs Report?

November 6, 2009

The Labor Department reported on Friday that 190,000 more jobs were lost in October, only slightly worse than the consensus forecast of 175,000 lost jobs, and job losses for August and September were revised to fewer losses than previously reported. Good news. The negative surprise was that the unemployment rate shot up from 9.8% in September to 10.2% in October, considerably worse than expectations that unemployment would rise to 9.9%.

But should the report influence thinking in either direction regarding the prospects for economic recovery?

I don’t think so.

As I have noted in this column before and is widely understood, employment is a lagging indicator. Businesses won’t need more employees until well after the economy has bottomed, recovered, and consumers are buying their products at a brisk pace again.

When an economy begins to recover from a recession, which it apparently did this time in the third quarter, businesses are suspicious of the sustainability of the recovery and reluctant to hire additional workers until they absolutely must. Meanwhile, in efforts to cut costs during a slowdown, most businesses begin by cutting the hours of employees, and then are forced to cut costs further by firing workers. That process reverses as an economy recovers, with the first step to meet improving sales being to increase the hours of remaining workers, first back to normal, and then to put them on overtime hours, before hiring more workers.

This time around, as could be seen by Thursday’s Productivity Report (productivity in the U.S. rose an astounding 9.2% in the third quarter), businesses have also been unusually successful in getting more production out of fewer employees. So employment is liable to lag even further behind the economic recovery this time than normal.

Yet pundits continue to either worry or rejoice over each report that involves the jobs picture, even including the weekly ups and downs in the number of new unemployment claims.

It doesn’t make a lot of sense, since economists, the Federal Reserve, and most of those same pundits expect the employment picture to continue to worsen even as the economy recovers (as is normal in recoveries). Prior to Friday’s jobs report the consensus forecast, including that of the Fed, was that the unemployment rate will continue to rise as the economy recovers, peaking at 10.5% in mid-2010. (With unemployment unexpectedly already at 10.2% in October that forecasted peak will no doubt be raised).

So if the employment picture is not the place to look for signs of whether the third quarter recovery is sustainable, where should we be looking?

A few weeks ago in this column I said the economic problems began in the housing industry and the recovery will begin in the housing industry. Home sales and home construction did pick up in the summer months, and were important to the 3.5% GDP growth (the end of the recession) reported for the third quarter. So I suggested that we needed to watch for reports of housing activity in October, as this quarter was getting underway.

Consumer spending in general is also of much more importance than jobs reports as an early sign of a sustainable economic recovery. According to the Bureau of Economic Analysis, consumer spending accounts for 71% of U.S. GDP (up from the long-term average of 65% since business spending has declined even more than consumer spending in the recession).

Unfortunately the most recent reports from the housing industry and consumer spending are mixed and indicate more evidence is needed one way or the other.

For instance, new home sales unexpectedly declined in September, and permits for future new home starts plunged, even though the government bonus program to first-time home-buyers was still in effect. However, existing home sales continued to rise in September, as they had in the summer. We need to see housing numbers for October, the first month of this quarter.

There are some October reports in on consumers. Unfortunately, they show that consumer confidence fell sharply in October, after rising through the summer. That’s not a good first impression that consumer spending will drive GDP growth this quarter, as it did in the third quarter.

We do need October reports from the housing industry and consumer spending, but I believe we can ignore the debates over the October jobs report (although the headlines reporting the unemployment rate has spiked up to 10.2% is not likely to be a positive for consumer confidence).