By Rick MacDonald With a huge amount of fiscal and monetary stimulus in the pipeline, the U.S. economy appears poised for a second-half pickup. But the optimistic outlook is tempered by a longer-term concern: ongoing weakness in the labor market.
Admittedly, employment trends tend to be lagging indicators of growth, which suggests that conditions for job-hunters could be on the verge of a turn for the better as the U.S. enters 2004. Nonetheless, the level of net new hiring over the past year has been a big disappointment, even as the economy has shown signs of improving. An even bigger worry has been the inability of the laid-off to find new jobs, with the duration of unemployment across several measures now hovering near all-time highs.
The weakness was made plain in the June employment report released July 3. The jobless rate rose 0.3%, to 6.4%. This marks the worst one-month deterioration in that widely watched gauge since October, 2001 -- the immediate aftermath of the September 11 terrorist attacks -- and the highest level of unemployment since April, 1994. Worse, the duration of unemployment continues to rise, with the median length jumping to 12.3 weeks in June from 10.1 weeks in May. This matches the all-time high seen in May, 1983 (the data go back to 1967).
RECESSION LEVELS. That comparison is all the more interesting given that the unemployment rate back in May, 1983, was over 10%. While some faulty seasonal factors may be skewing the data -- the median duration of unemployment spiked last June also -- other related measures show a similar deteriorating trend.
Another measure, average duration of unemployment, jumped to 19.8 weeks from 19.2 weeks in May, that figure's highest level since 1984. Similarly, the percentage of workers out a job for 27 weeks or more lingers near figures consistent with the worst levels of a recession -- even though most analysts believe the latest downturn ended over a year ago.
Data from the states -- namely, monthly unemployment insurance numbers -- also confirm these trends. For May, the most recent month available, the "exhaustion rate" (a measure of the percentage of individuals who use up the full 26 weeks of unemployment insurance) jumped to 43.6% from 43.1%. That's a new all-time high for this data series, which dates back to 1972. And the weekly continuous claims series is also near 20-year highs.
WEAKER THAN IT LOOKS? Overall, people are staying out of work much longer than would be expected given the current unemployment rate -- and given that forecasters view the economy as being on the cusp of an acceleration. It's also remarkable when you consider that the Internet allows individuals to identify and apply for job opportunities more quickly than ever before -- which should lessen search times, all other things being equal.
However, with still-impressive trends in productivity increases, workers may not be called back so quickly when the economy picks up steam. Indeed, stronger growth in the second half could easily be achieved at a lower level of labor utilization than in the past.
At the least, the ongoing lengthening in the duration of unemployment hints that the labor market is actually weaker than what the 6.4% jobless rate implies at face value. And until hiring finally picks up, the Federal Reserve's concerns about sustainable growth will likely persist. In that regard, Fed Chairman Alan Greenspan's testimony before the House Financial Services Committee on July 15 will be carefully scrutinized for his latest views on this topic.
ALTERED SCENARIO. Right now, financial markets are still betting that Fed policymakers will stand pat on rates as they wait for the recovery to gain traction. Prices of Fed funds futures, a vehicle for market pros to bet on future moves in interest rates, indicate that traders expect Fed policy to remain unchanged for the rest of the year.
More bad news on the jobs front, though, could change things fast. A continued worsening could prompt Greenspan & Co. to opt for the "second half" of the 50-basis-point cut that many analysts expected at its June 25-26 meeting. While such a move isn't our "official" policy forecast at MMS International, given our more optimistic economic outlook, we'll certainly be keeping a close watch on this potential trouble spot. MacDonald is a senior economist for MMS International