Saturday, October 3, 2009

A pattern of increasingly longer employment recoveries

An extremely useful chart was recently posted on the Calculated Risk site, showing recovery rates in US employment in all the previous recessions since WW-II. The author points to the fact that the recent revisions to employment figures have been worse than originally reported.

Given that the markets' focus is now back on employment, the trend is quite unsettling. However if you look closer at recent recessions, a frightening pattern emerges.

The last three recessions had consecutively longer periods of employment recoveries, increasingly lagging the GDP. This is probably worth further research, but one hypothesis is that credit driven employment growth takes longer to recover after a recession. In particular as the US shifted away from manufacturing, a great deal of job growth came from credit sensitive businesses such as construction. There is evidence that other than the Clunkers driven manufacturing blip, which has now stalled, a great deal of current employment activity changes is driven by construction spending.

If credit is indeed responsible for the consistently longer employment recoveries in previous recessions, we are in for some tough times even if GDP growth returns. The US is now into 21 months of employment contraction, reaching a post-WWII record, with no signs of unemployment peaking.

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