US Economy Will Return To December 2007 Employment Levels... In 2021!
Even as Bernanke is receiving his last minute briefing on what to say (everything, EVERYTHING, is good) and what to play dumb on (explaining the price of gold for example), a new report by the Center for Economic and Policy Research concludes that digging ourselves out of the current unemployment hole, which is 7.5 million less people having jobs than did in December 2007, will take at least 4 years, and not occur prior to March 2014. However, this assumes a flat working-age population, something the Fed would love to be the case. Alas, the country is growing: and if one incorporates the effects of labor force growth into the above analysis, as the CEPR authors have done using CBO projections, then we may have a much larger problem on our hands: the study concludes that taking into account the approximately 14 million new job seekers in the future, then the December 2007 unemployment rate will not be met until April 2021! Welcome to the new normal. Of course, both of these analyses assume that the economy will immediately commence growing and generating jobs at the recovery rate seen in the 2000s, when about 166,000 jobs per month were being added. With every month that this does not happen the 2021 date will continue being pushed out further into the future. Perhaps one of the Senators today can ask a question of Bernanke just how he plans on reconciling this glaringly simple explanation for why the US economy will be underwater for a period of over a decade.
The CEPR report first describes the hole we are in:
Figure 1 shows the monthly change in total employment in the U.S. economy, using the Bureau of Labor Statistics’ monthly establishment survey, from the peak of the 2000s business cycle (December 2007) through the most recent month available (June 2010). Job losses peaked at about 700,000 per month between November 2008 and March 2009. From spring 2009 through the end of that year, the economy continued to shed jobs at a slower and slower pace. In 2010, the economy started to create jobs (on net) for the first time since 2007. Job growth was particularly fast in May 2010, but about 411,000 of the 431,000 net jobs created that month were temporary jobs with the decennial census. The economy shed 100,000 jobs in June 2010, in part reflecting the loss of temporary census jobs.
The monthly job loss figures, however, don’t give a clear picture of the depth of the problems facing the labor market. Figure 2 reproduces the net monthly job loss data from Figure 1, but also displays the cumulative change in employment, relative to the total employment level in December 2007. The main difficulty facing the labor market is not the employment losses in any given month, but rather the cumulative effect of two years of almost continual job losses. For seven months beginning in September 2009, the economy was over eight million jobs below its December 2007 level. Even with the jobs created so far in 2010, the economy remains almost 7.5 million jobs short of its prerecession level.
Looking at projection scenarios, here is the baseline scenario, which alone provides no Joy in mudville: using an assumed expansion case seen in the 2004-2007 economic recovery in which 166,000 jobs per month were created, the current 7.5 million hole would take about 4 years to fill.
Figure 3 shows the results of projecting future job creation assuming that, from July 2010 forward, the economy creates jobs at the same pace as the fastest four calendar years in the most recent economic expansion. (The period covers January 2004 through December 2007; job creation rates were about 0.12 percent per month, or about 166,000 jobs per month given the size of the current workforce.) The point where the projected cumulative job loss line crosses zero marks the year and month when overall employment will have returned to its December 2007 level. So, if job creation from here on proceeds at the same rate as it did in the 2000s expansion, the economy will not restore December 2007 employment levels until March 2014.
Yet what many completely have ignored up until the authors of this paper put it to paper, is that the US population is a-growing, and that factoring in the organic expansion of the US population will add millions to the labor force over the next decade: according to CBO estimates, the natural labor force growth rate is 90,000 a month. Adding this to the running future gap makes things far worse for any administration that will run on the promise of returning unemployment rate to recent levels. From the paper:
Meanwhile, the working-age population of the United States will be growing, as a steady stream of potential new workers enters the labor force each month. Returning to the December 2007 level of employment many years after that level was first achieved will still leave the economy in a jobs deficit relative to this expanded labor force.
Figure 4 incorporates the effects of this labor force growth into the analysis. The top line in the figure shows the cumulative change in the labor force, assuming that labor force growth follows CBO projections. (Based on CBO (2010), Table 2-2. This is analogous to the cumulative change in employment in the bottom half of Figures 2, 3, and 4. The CBO does not publish monthly projected increases in the labor supply, but these rates are implicit in their labor-market projections. Based on CBO projections, we assume a monthly growth in the labor force of just over 90,000 workers per month from January 2008 forward. Our projections assume that five percent of this increase will be unemployed at any given time, consistent with long-term CBO projections that the labor market will eventually return to a five percent unemployment rate.) In this figure, the point where the line for the cumulative job change crosses the line tracing the cumulative growth in the labor force marks the year and month where the economy will have made up for both the jobs lost during the recession and the intervening growth in the labor force. If we assume job creation from July 2010 forward occurs at the pace set in the 2000s expansion, the economy will not catch up with the expanded labor force until April 2021.
Another way of looking at Figure 4 is to note that the line for cumulative job change crosses the cumulative change in the labor force at the point where the employment-to-population rate returns to what it was in December 2007. The figure assumes that the economy only needs to create jobs for 95 percent of the increase in the labor force, because CBO assumes that the economy will eventually reach and maintain a five percent unemployment rate. In 2007, the employment-to-population rate for the population 16 and over was 63.0 percent, almost 1.5 percentage points below the employment-to-population rate in 2000. Our projections, therefore, set a low bar for total employment relative to a standard that would require returning to the 2000 employment rate.
And keep in mind that the above scenario assumes that the economy adds 166,000 jobs a month each month, for just under 11 years straight! With the current economic prospects for the economy, in which companies continue to lay people off, and in which monthly NFP data is skewed drastically due to the ongoing side effects of the census, and where fiscal stimuli in fact encourage people to be unemployed and collect jobless insurance rather than work, this baseline assumption is ludicrous. The reality is that the economy will likely NEVER return to a December 2007 jobless rate, as proposed by El-Erian and his New Normal concept, just like the Fed will most likely NEVER raise rates in this latest iteration of pre-reset capitalism. And as the Fed's dual mandate of jobs and inflation is now tarnished beyond repair, what other valid justification is there to retain the Federal Reserve which does nothing but skew the market, and necessitate the need for constant regulation? The only way to return to efficient markets is to do away with regulation completely, however that would also mean an elimination of the Fed, and its most artificial concept of free lending to banks via the Discount Window, i.e., endless moral hazard for Wall Street's casinos. As long as the Fed persists, regulation is needed, which by definition creates perfect assymetries in the market, and sows the seeds for the next market crash. One can only dream that instead of lying to the population and to the Senate that all is well in the economy, that at today's Humphrey Hawkins meeting Bernanke will instead anounce the end of the Fed. Alas, that will require a revolution (non-violent or otherwise), as the moneyed interests will never allow a change in the status quo of such massive proportions. Of course, if more and more people realize the true sad state of the economy driven to its current predicament precisely by the Fed's constant one sided actions which favor a few millionaires at the expense of those that will be jobless for decades to come, perhaps this revolution is not that far off...