As the new millennium dawned, Americans greeted it with joy, hope, and the expectation of a bright and prosperous future. The country was at peace, the economy was growing robustly, the stock market was reaching new highs, and the government budget was in surplus. Unfortunately, the first decade of the new millennium turned out to be one Americans would just as soon forget. The bursting of the technology and credit bubbles resulted in a lost decade for equity investors, two recessions, the largest budget deficit in the nation’s history, a mountain of government debt and double-digit unemployment. The terrorist attacks on 9/11 took more American lives than Japan’s attack on Pearl Harbor, resulting in prolonged wars in Iraq and Afghanistan.
Having greeted the new millennium with joy and hope, a decade later Americans are exhausted, disillusioned, and worried about their future. Ominously, the number of jobs in the US actually contracted during the decade; a first in data reaching back to 1939. Even if one rolls the data annually, resulting in 61, 10-year periods over the last 70 years, the last decade remains the only one in which the economy has shed jobs. At the end of 2009, there were 944,000 fewer jobs in the US than at the beginning of 2000 (Chart 1). Now there is growing concern that the recovery may be “jobless."
The recoveries following the 1990-1991 and 2001 recessions were notable for their relative lack of job creation. In the first instance, the unemployment rate peaked at 7.8% 15 months after the end of the recession while in the latter it peaked at 6.3% 19 months after the recession ended. Both recessions were brief, lasting eight months, and included only two quarterly contractions in output. Conversely, the National Bureau Economic Research (NBER) has yet to officially signal an end to the recession that began two and a half years ago. The economy contracted in five of six quarters through June 2009 and the economy shed more than 8.3 million jobs as the unemployment rate climbed from 5% to 10.1% in October of last year. The NBER is unlikely to place the trough in economic activity prior to June 2009, suggesting this recession will be at least 18 months long.
Historically, deep recessions have been followed by strong recoveries. However, our position has long been that the collapse of the credit bubble would result in years of subdued growth. Indeed, much of the data over the last four months has pointed to a slowing of the recovery. Yet it remains far from certain that this recovery will be “jobless.” Postulating that the recession ended in June 2009, we reviewed private sector employment over the 13 months subsequent to the end of the last three recessions. We decided to review private sector jobs, rather than the more often reported total non-farm payrolls to eliminate the impact of the decennial census, which has distorted total non-farm payroll figures from March through July of this year, or for five of the 13 months we wished to review (Chart 2).
In both recessions this decade, private payrolls declined in the first four months after the recessions ended while they declined in three of the first four months following the 1990-1991 recession. Private payrolls suffered far greater losses in the four months following the recent recession than they did in the four months subsequent to the previous two recessions. However, over the ensuing nine months, the private sector continued to shed jobs in the aftermath of the 2001 recession and added a paltry 77,000 following the 1990-1991 recession. Conversely, private sector employment increased in eight of nine months through July of this year, adding more than 600,000 jobs (Charts 3 & 4).
The net result is that over the 13 months following this recession, the US economy has lost 338,000 private sector jobs, 6,000 more than over the same period following the 1990-1991 recession, but far fewer than the nearly 1 million lost over the 13 months following the 2001 recession. The data for June and July of this year remain preliminary, but revisions won’t alter the fact that private employment gains over the last nine months have far outstripped those registered during months five through 13 following the previous two recessions.
Additionally, evidence suggests that the private sector is positioned to continue adding employees. Corporate profits with inventory and capital consumption adjustments, or profits from current production, suffered a harrowing decline of nearly 40% from their peak in the third quarter of 2006 through their nadir in the fourth quarter of 2008. However, they have rebounded dramatically and are now less than 5.5% below their 2006 highs (Chart 5). Additionally, JP Morgan notes that cash as a percentage of current assets at S&P 500 companies was more than 25% at the end of the first quarter of 2010. Solid earnings and large sums of cash on the balance sheet, which earn nil, provide companies with an incentive to reinvest in their businesses to increase their ROE. By reinvesting in their own business, companies create demand at the vendors that supply them with goods and services. This, in turn, is likely to result in additional hiring by the vendors, creating a multiplier effect. Finally, worker productivity appears to have peaked. The final three quarters of 2009 witnessed the strongest productivity growth over any three consecutive quarters since the first three quarters of 1961. Productivity, which typically peaks during the 12 months following a recession, declined during the second quarter of this year. As such, it appears likely that companies have squeezed all they can from their work force and that even modest growth in demand is likely to result in new hires.
After the 1990-1991 and 2001 recessions, the unemployment rate peaked at 7.8% and 6.3%, respectively. This recession as been far deeper with unemployment peaking at 10.1%. The US employment market lost more jobs in 2008 and again in 2009 than in any other year since the Great Depression. Employers cut staffing to the bone, fearful that the economy would fall off a cliff. Having avoided that fate, it is likely that the private sector will continue adding jobs at a faster rate than it did following the previous two recessions.
Will this recovery prove to be jobless? The evidence suggests not, yet it is likely to feel as though it is. While we continue to believe that the economy will avoid the dreaded double-dip, growth is likely to remain modest as the consumer and the financial sector continue to de-lever. As such, the economy will be challenged to add enough jobs to accommodate both displaced workers and new entrants into the workforce. As a result, we suspect that unemployment will remain above 7.5% through the end of 2012 and is likely to remain elevated relative to the levels of the last 20 years throughout the next three to five years.