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Looking Beyond Tomorrow's Non-Farm Payroll Number To Spot A Negative Shift In Structural Unemployment

Tyler Durden's picture





 

Goldman chief economist Jan Hatzius has created a useful preview of tomorrow's NFP number (consensus +90,000 private, -65,000 overall), explaining why Goldman has a more negative outlook on the number than most (+75k and -75K, respectively). Jan's conclusion on tomorrow's, and recent trending data :"Our view remains that the primary job market problem is a shortfall in labor demand." More relevantly, Hatzius does an extended analysis of the Beveridge curve (i.e., the relationship between unemployment and job vacancies) to determine if there has been a shift in the overall level of structural unemployment

, as opposed to the more simple seasonal variety. Hatzius' modestly negative conclusion: "The answer is that the vacancy rate has not picked up by enough to push gross hiring sufficiently far above gross separations—i.e., layoffs plus quits—to create large numbers of net new jobs...  Structural unemployment may well increase over time if large numbers of people remain without a job for long periods of time, and thus lose their skills and attachment to the labor force.  But it is not clear that this process has started yet."

Full note from Jan Hatzius:

Jobs Preview, and Some Thoughts on Structural Unemployment

We estimate that private payrolls in July rose 75,000, close to the average pace of the past two months but more slowly than earlier in the year.  Overall payrolls probably declined by about 75,000 as a result of Census layoffs, and the unemployment rate probably edged up to 9.6%.  On balance, our forecasts imply that job market conditions have not changed much in the last month.
 
Today’s comment takes a look at the supply side of the labor market.  Some have argued recently that the failure of the unemployment rate to decline significantly over the past 6-9 months despite a notable rise in job vacancies shows that the “matching efficiency” of the US labor market—its ability to turn open positions into jobs—has started to deteriorate.  Such a development would suggest that the structural unemployment rate has risen and that there is perhaps not as much cyclical “slack” in the labor market as one might think at first glance.
 
An increase in structural unemployment is possible, but at this point the conclusion seems premature.  Indeed, the increase in job vacancies has coincided with a significant increase in gross hiring over the past year.  However, neither vacancies nor hiring have risen by enough to create large numbers of net new jobs.  Our view remains that the primary job market problem is a shortfall in labor demand.
 
We expect Friday’s employment report for July to come in slightly weaker than the current market consensus.  We estimate a 75,000 gain in private payrolls (consensus +90,000) and a 75,000 drop in overall payrolls (consensus -65,000), with most of the 150,000 difference accounted for by a drop in Census employment.  We also expect the unemployment rate to edge up to 9.6% (consensus 9.6%) and average hourly earnings to show a 0.1% gain (consensus 0.1%).  This would mean that payrolls will show a gain well below the average of March/April (200,000) but somewhat above the average of May/June (58,000).
 
Our forecast this month is not far from the consensus, so instead of dwelling on the strong and weak points in the recent labor market data—short version: claims inconclusive, ISM employment indexes a bit stronger, consumer job perceptions weaker, online hiring indexes firmer—we will devote today’s comment to a longer-term labor market issue.  This is whether we are seeing the first signs in the labor market data of an increase in the “structural” rate of unemployment.  There are many different angles on this issue, and we only focus on one today, namely what to make of the recent shift in the relationship between unemployment and job vacancies.  (Economists refer to this relationship as the “Beveridge curve”, named after William Beveridge, a British economist and civil servant in the first half of the Twentieth Century.)
 
The chart below shows the “breakdown” of the Beveridge curve, plotting the unemployment rate on the horizontal axis and the job vacancy rate on the vertical axis.  After tracing out a near-perfect downward-sloping curve for most of the past decade, the observations over the past few months have been notably above and to the right of the previous relationship.  Such a move is often viewed as a sign that the “matching process”—the efficiency of the labor market in bringing together jobs and job-seekers—is deteriorating (for more on this issue, see the blog post by David Altig, head of research at the Atlanta Fed: http://macroblog.typepad.com/macroblog/2010/07/a-curious-unemployment-picture-gets-more-curious.html).

However, the evidence for a breakdown in matching efficiency is far from clear-cut.  For starters, reliable job vacancy data (from the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS) are only available back to 2000, so the plot of the Beveridge curve above is only based on one-and-a-half business cycles.  This means that the “breakdown” of the Beveridge curve relative to prior patterns is effectively based on a very small number of observations

Moreover, we would note that while the unemployment rate remains very high, gross hiring has actually picked up significantly.  As shown in the chart below, the increase in hiring has been roughly what one would have expected relative to the increase in vacancies, again based on the experience of the past decade as reflected in the JOLTS data.  Admittedly, one might argue that hiring should have picked up even more than it has, since there are now a lot more job-seekers per vacant job than in the past.  But historically, the number of gross hires has been more closely related to the number of vacancies than to the number of unemployed.  In our view, this makes sense, because gross hiring can come not just from currently unemployed workers, but also from the currently employed as well as the economically inactive.  The fact that the link between vacancies and hiring still seems broadly intact therefore casts doubt on the notion that the efficiency of the US labor market in filling job vacancies has deteriorated significantly—or at minimum, renders such a verdict premature.

So why is the labor market still stuck in the doldrums?  The answer is that the vacancy rate has not picked up by enough to push gross hiring sufficiently far above gross separations—i.e., layoffs plus quits—to create large numbers of net new jobs.  But that is a statement about the demand for labor, not about the efficiency of the matching process and the structural rate of unemployment.  To be sure, structural unemployment may well increase over time if large numbers of people remain without a job for long periods of time, and thus lose their skills and attachment to the labor force.  But it is not clear that this process has started yet.
 
Jan Hatzius

 

 


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Thu, 08/05/2010 - 18:53 | Link to Comment RobotTrader
RobotTrader's picture

Seems to me that instead of "soup lines", we have iPad lines at the Apple store and velvet barrier lines at the top nightclubs in Vegas.

The girls around here continue to spend tons of money on liposuction, Botox, anti-wrinkle creams, and European lingerie.

Looks to me that instead of the "Great Economic Collapse", we are simply "muddling through" as predicted by the Grey Poupon carrying John Mauldin...

No doubt, Mr. "Muddle Through" is probably riding around in his Rolls Royce with a female driver these days...

Thu, 08/05/2010 - 18:55 | Link to Comment George the baby...
George the baby crusher's picture

That girl in the photo wearing the European lingerie, there's not a chance in hell she needs liposuction. You're delusional Mr Robotrader person.

Thu, 08/05/2010 - 21:50 | Link to Comment ISEEIT
ISEEIT's picture

As lovely as she is, that Girl/Woman represents a whole lot more than the current Leftist meme will admit. She might be a great symbol for Capitalism and free markets?

How hard/smart would you like to work?

I'm not trying to inject morality into this: ( yes, I am. actually!).

I believe that what the Leftist are up to is immoral. They are in fact robbing Peter to pay Paul.

Spin it as you wish, blame whoever, you wanna play Daddy?

Okie dokie.

We are watching and you are failing.

 

Thu, 08/05/2010 - 23:17 | Link to Comment Iam_Silverman
Iam_Silverman's picture

"there's not a chance in hell she needs liposuction"

Ask to see the BEFORE picture....

Nip, tuck, suck, suck, suck.  Viola'!

Thu, 08/05/2010 - 19:12 | Link to Comment Sisyphus
Sisyphus's picture

<Quagmire> Giggity Giggity Goo </Quagmire>

Thu, 08/05/2010 - 21:04 | Link to Comment Astute Investor
Astute Investor's picture

In Chicago, we have lines for Sprinkles Cupcakes.  Can't decide who has a greater hold over the masses - Oprah or Steve Jobs.

Thu, 08/05/2010 - 21:54 | Link to Comment ISEEIT
ISEEIT's picture

Short Oprah and Steve. Capitalism forever demands fresh meat.

Just the way it is.

Thu, 08/05/2010 - 22:56 | Link to Comment Azwethinkweiz
Azwethinkweiz's picture

In Los Angeles, we have lines around the block for cupcakes, frozen yogurt and just about anything coming out of a 'gourmet' roach-coach. The sheeple must eat and eat they will!

Thu, 08/05/2010 - 20:35 | Link to Comment Apply Force
Apply Force's picture

yeah... riggghhht robo. ha ha.  Almost 41 Mil on SNAP and and equal and growing number in search of ipads and vegas vacations.

Sounds about right < >

Thu, 08/05/2010 - 23:10 | Link to Comment Iam_Silverman
Iam_Silverman's picture

"The girls around here continue to spend tons of money on liposuction, Botox, anti-wrinkle creams, and European lingerie."

So, the wives and mistresses of the Wall Street and DC Elite are living well.

The financial crisis must be over then!  Lets all get loans to buy stocks - leverage is your friend!

Is this like just before the French Revolution where some famous (now headless) aristocrat states "They have no bread? Then let them eat cake"?  That helped to rally the masses, just not in the direction they hoped.

Thu, 08/05/2010 - 18:59 | Link to Comment MountainHawk
MountainHawk's picture

Too early for economic collapse, the pressure vessel hasn't reached critical pressure yet. Come on rally!!!

Thu, 08/05/2010 - 21:19 | Link to Comment papaswamp
papaswamp's picture

I'm with you...feeling a black october myself...but who knows

Thu, 08/05/2010 - 19:46 | Link to Comment FunkyMonkeyBoy
FunkyMonkeyBoy's picture

It's gonna be a big down day tomorrow on heavy volume as the payrolls will disappoint hugely, setting off the next leg down.

Thu, 08/05/2010 - 19:57 | Link to Comment GIANTKILR
GIANTKILR's picture

I have thought this too many times and been wrong. I bet we end in the green or flat like today. There will never be a big down day again. They wont let it! Go all in. They are looking for that magic 14,000 number. Then you will think there was a recovery!!!! See we told ya!!!! I betcha!

Thu, 08/05/2010 - 20:13 | Link to Comment FunkyMonkeyBoy
FunkyMonkeyBoy's picture

OK, you've convinced me, i've just reversed all my shorts and am now all in long with no stops. Easy money.

Oh, and i've just chucked all my gold and silver coins out of the window too, can't have that rot taking up room.

Thu, 08/05/2010 - 20:20 | Link to Comment qikbucks
qikbucks's picture

McD's and KFC both hired 150k each last month.. no worries.. we just have to eat our way out of this mess.

Thu, 08/05/2010 - 20:31 | Link to Comment GIANTKILR
GIANTKILR's picture

There are no fundamentals anymore just politics. We can't have the big O looking like he failed, so monkey pump the markets. It wont crash unless they want it to now. Think about how much of the economy this administration has taken over since in office. This is only what we know about. How much have they taken over behind the scenes and under cover? They have total control!!!

Thu, 08/05/2010 - 21:21 | Link to Comment banksterhater
banksterhater's picture

Wall St $$$ has shifted to Repubs, they don't give a crap for Mr.O, a break occurred, Gasparino said several months ago.

Mr. Obummer has no clue what the HFTs are going to do, and I don't think they leak the job # either.

If they prop on bad news, next week down 5% for sure.

Support= SP 1115, Dow 10,425

 

Thu, 08/05/2010 - 22:36 | Link to Comment Everyman
Everyman's picture

No kidding, the group dementia shown by the perma bulls are akin to this:

 

http://www.youtube.com/watch?v=vod9DL4IhBM

 

"I can't help it, it's so pretty."

Thu, 08/05/2010 - 21:51 | Link to Comment johngaltfla
johngaltfla's picture

I'd wait until after Labor Day to wager.

I'm just sayin'....

Thu, 08/05/2010 - 20:14 | Link to Comment three chord sloth
three chord sloth's picture

"So why is the labor market still stuck in the doldrums?"

That's easy to explain, and it doesn't take a long article about the matching process. One word: overcapacity. Why is there overcapacity? Again, one word: China.

Until most Chinese workers are paid a middle class wage there will be world-wide overcapacity... the old "workers should be able to buy what they make" path to a prosperous society. As long as they cannot there will be high unemployment and wage deflation in the US.

Our money flows East to purchase things, but little flows back... the workers cannot afford much of what we have to offer. The money instead flows up, and when the Chinese bigwigs and government collects enough from the multitudes they buy US government paper, which completes the circle. Unfortunately that leaves many US workers on the sidelines.

Think of it this way -- everytime you buy an iPad, you're really buying a bond, and getting the iPad as a bonus. Which is one more reason things will not change soon... the US government wants to get dollars into the hands of bond buyers, and the Chinese government and ownership class buys US bonds... at least for now. And you don't.

But to get back on the point: China gobbles up big chunks of US stimulus money, US discretionary spending, US business investment, etc... and spits out overcapacity and wage deflation. If you want that to stop, well... change the trade laws.

Thu, 08/05/2010 - 21:36 | Link to Comment Shameful
Shameful's picture

Believe it or not this has happened before.  Before the Opium Wars the Chinese would not accept western goods in exchange for theirs, they only wanted silver.  Drained a lot of silver out of Europe to.  Solution, hook them on opium.  Problem solved and China was gutted and occupied for years.

History is unfolding again and if the CIA was worth their salt they would be flooding China with heroin.  Come on guys, show us your pros!  Get in there and sell some damn heroin! /sarcasm

Thu, 08/05/2010 - 21:48 | Link to Comment IBelieveInMagic
IBelieveInMagic's picture

India on deck, Bangladesh in the hole, Vietnam in...

You can keep wishing for changes in trade laws. It will happen the day the US dollar is no longer the global reserve currency -- until then this hollowing process will continue to the detriment of labor to benefit top management and the financial sector.

You are lucky if you happen to be employed in finance, defense, energy or government sectors -- all others, including healthcare, will be cast away to retain the global reserve currency.

Thu, 08/05/2010 - 20:19 | Link to Comment TraderTimm
TraderTimm's picture

I know technicals have been relegated to the root cellar during these times, or perhaps only when the robots deem them worthy - but I can't help but notice the rising wedge pattern on the daily Dow and contemplating the downside breakout potential.

http://bit.ly/cYlRFA

Guess I'll find out after the NFP number.

 

Thu, 08/05/2010 - 23:15 | Link to Comment Iam_Silverman
Iam_Silverman's picture

As far as the article goes - what?  I see a whole lot of words trying to say that they think the non-farm labor report will be flat (75k jobs created, 75k jobs deleted), but they aren't sure.  And then they explain, in a very technical way, that unemployment is high because not enough people are being hired.

Oh, really?

Fri, 08/06/2010 - 06:19 | Link to Comment Jendrzejczyk
Jendrzejczyk's picture

"Our view remains that the primary job market problem is a shortfall in labor demand."

Just silly, isn't it.

I've spent the last 10 hours studying the cause of my hunger and concluded that I am hungry because I haven't eaten.

Thu, 08/05/2010 - 23:39 | Link to Comment banksterhater
banksterhater's picture

Mish is getting under the BLS skin exposing/collaborating with ADP on the birth-death fraud. The ADP-BLS numbers are too far apart and the BLS is using annual revisions to make up for their fucked up model. They know it, keep writing and exposing this corruption til it's killed.

http://globaleconomicanalysis.blogspot.com/

Fri, 08/06/2010 - 02:56 | Link to Comment Tense INDIAN
Tense INDIAN's picture

just asking ------what si more devastating for stocks ...a Head n Shoulders ...or a rising wedge??

Sat, 10/09/2010 - 09:53 | Link to Comment senthil456
senthil456's picture


There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
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