Some recovery!

...reposted from Autos and Economics...

The US recovery continues at a snail's pace; the auto industry is doing better. The rise in the SAAR [seasonally adjusted annual rate of sales] puts us below the bubble-inflated peak of 2005-6, but given subsequent population growth is at a more sustainable level. Other auto-related indicators show marked improvement, but suggest we still have a ways to go. First, the share of the auto industry (retail and manufacturing) was at 2.3% of the labor force in the late 1990s; it then fell steadily to 2.0% before falling off a cliff in 2008. The nadir was 1.6%; today we're back to 1.8%. That is only about halfway, assuming that other structural changes in the US (the continued growth of healthcare) makes it possible to return to the days of yore.

...automotive employment's only about halfway back...

If we look at the details, we get a more nuanced story. The retail side (which includes auto parts and not just vehicles) peaked at about 1.9 million workers; it fell by 300,000 during the Great Recession, and is now 2/3rds of the way back to that level. Manufacturing took a harder hit, falling from 1.1 million at the start of 2006 to 1.0 million in 2007, before dropping by 400,000 in 2008-9 to just above 600,000 workers or less than half the level of the late 1990s. We're now back to almost 850,000, a sharper rise than in retail, but with further to go. Yes, suppliers are running at more than 100% capacity, and that must normalize. So employment will rise further, as overtime and other expedients are replaced by permanent hires. Still, it's not clear that the US is on track to get back to earlier levels, though over the next few years other changes may help (e.g., Honda's goal to export 30% of US-based production).

But overall the story from labor markets is of an anemic recovery. As the baby boomers retire, the growth of the working age population will slow. At present, however, we're only just keeping up with population growth, and the gap between "normal" employment (I tracked age-specific levels back to 1994) is large, roughly 9.1 million workers as of November 2013. Furthermore, more jobs are part-time while a sizeable share of the labor force that had been working employed full-time are still working short hours. If we adjust for that, we're shy 10.8 million full-time jobs. Let's not forget long-term unemployment either, the 27+ week component is improving but is only down to what had been previously been the historic peak.

...the low level of participation isn't just "boomer" retirement...

Finally, this is not due to boomers entering retirement early. Indeed, participation of older workers has trended up throughout the Great Recession and subsequent recovery. In other words, they aren't retiring with past rapidity. That's part of the reason that prime-aged participation rates remain below historic levels. Again, I've traced these levels back much futher – they were essentially flat going into the Great Recession. Now we can see a small increase since the worst of the recession, but only by about 1 percentage point to 95% of the previous norm. And the rate for young workers (age 20-24) remains in the abyss.

As someone who works on the Japanese economy, this halting recovery looks all too familiar. We may not see a lost decade, but we're already in the 6th year since the onset of the Great Recession. Real estate bubbles are matched by lots of debt, and resolving that overhang is a challenge. If lenders aren't expected to bear much of the loss (and through deposit insurance, the government), then households [in the US] and corporations [in Japan] must. That has real ramifications – including ironically a huge buildup in government debt, in the end offering up assets that it stingily refused to do earlier in the game.

      Click on the graphs to expand!

Folks, The Economy's Stalled (June 9 update)

...the economy is stalled...

The Bureau of Labor Statistics released the Current Population Survey and Current Employment Survey data for April 2013, which provide detail beyond "headline" unemployment (which by the way fell 0.1 percentage point to 7.5%).

I prefer to look at employment data, to lessen the impact of people moving in and out of the labor force. As my baseline I use demographics-adjusted trend employment, to reflect for example the retirement of the baby boomers.

The lead stories (e.g., Bloomberg) point to a drop in the headline rate and a rise in payrolls. However, when we compare employment to what we need to keep up with population growth, April 2013 saw no growth. The graph says it all. (Adding in changes in the number working involuntary short hours doesn't change the story – see the graph to the left.)

Unfortunately, this rate of employment growth leaves us years away from "normalcy" – assuming that we do return to pre-recession levels (and there's no good story why we would not). The projection is based on a regression fit done a couple months ago, when employment growth was higher. So it is if anything pessimistic. Now I can tell a story that once we reach a certain level of recovery, a virtuous circle will kick in leading to faster recovery. The more time passes, the fewer people who are underwater on their mortgages, and the more younger people who have built up a financial cushion sufficient to purchase or renovate housing. As the family budget crunch eases, other consumption will rise, helping the process. And so on. While waiting, let's not think about spillovers from Europe, or disruptions in the BRIC economies, or the possibility of irrational fiscal policy at home.

Finally, because others track employment-population ratios, I present those for 5-year age brackets. The data are noisy, presumably because of small sample sizes (especially for old workers). These show, first of all, that young workers bore the brunt of the recession, but that prime-age workers were hit fairly uniformly, too. Further, while above the 2010 nadir, there's no strong indication that things have improved in the past 12 months.

Note that, contrary to my expectations, early retirement does not jump out of the data. Employment as a share of population is down by 2% for those age 60-64, but actually rises for the 65, 70- and 75+ brackets. While that for age 55-59 is down, it's down by about the same amount as for other prime-age (potential) workers. Now these data make no distinction between part- and full-time employment, nor for wages, so they may mask changes for older workers. However, the overall message is that older workers have postponed retirement, not taken early retirement.

...Mike Smitka...

Prime-Age Worker Employment-Population

Older-age Employment-Population Ratios

It's not just kids and retirees

...early retirement and education aren't "safety valves"...

At 8.3%, "headline" unemployment represents 1 in 8 would-be workers without jobs. Furthermore, we know that we're seeing not just high unemployment but also a big drop in the size of the labor force. That is, we've observed a big drop in the unemployment-population ratio.

OK, but isn't this just youth staying in school longer? And baby boomers who are retiring, or retiring early? After all, the unemployment rate for "prime" workers is 7.2%, rather lower than the July 2012 average of 8.3%. And if we're thinking of the impact on families -- kids -- high "primer earner" unemployment is more worrisome than that at the young and old ends of the age spectrum.

Now for the population as a whole employment has fallen more than unemployment has risen. Rephrased, the non-participation [in the labor force] rate rose, from 33.9% in January 2004-December 2006 to 36.2% over the 6 months ending in July 2012, a 2.3% rise. Relative to the base (66.1%) that's equivalent to a 3.5% rise in unemployment. If we add that to the headline rate we get 11.8%.

This sort of shift doesn't typify previous recessions. But perhaps this time around it's not the recession but long-term trends that happen to be showing up now. [See the graph below on the long-term trend.] In particular, we've far more youth in higher education, and baby boomers are in their early 60s. So it could be that large numbers of younger individuals are staying in school -- or, having grim job prospects, are enrolling in community colleges en masse. Meanwhile, for the boomers, while retiring before age 65 may be painful, it's feasible. And government workers and others can qualify for pensions before age 65, and don't have to wait on social security.

Unfortunately, the data show it's not just boomers and students: the shift for the prime age workers (age 25-54) is in fact is larger than that for the population as a whole. We're not in fact seeing a boom in schooling and early retirements.

In particular, during the bubble era 2004-7 prime age labor force participation rose by 1.4 percentage points, from a peak of 78.7% to 80.3%, and averaged 79.4% over January 2004-December 2006; over the last 6 months, through July 2012, it's averaged 75.7%. That's a drop of 3.7% (and an equivalent rise in the non-participation rate). Doing the same arithmetic leads to an adjusted unemployment rate of 11.9%. At one level it's not surprising; prime age workers (25-54) are a large proportion of the standard labor force (age 16-64), so the averages can't diverge all that much. Still, I'd hoped otherwise. But early retirement and education aren't "safety valves" that mute the impact of the Great Recession. That's not the case

...Mike Smitka...