Payroll Gains a Long Way Off

After the 2000-2001 recession, steady job gains did not recur until October 2003. It was a classic "jobless recovery" that led to doubts as to whether it was actually a recovery at all.

The trends in 2009 and 2010 might be similar.

It would be a mistake to place too much emphasis on the May jobs report as signaling a move toward job gains. The trend certainly looks good:

The trend suggests that within a few months job gains might occur. History and new claims data suggest this is not likely.

The relationship between new claims for unemployment and payrolls is by no means precise. Claims only reflect the job loss side of the question and indicate little about job gains. Nevertheless, a rule of thumb is that 400,000 in weekly new claims equates to about unchanged payroll levels.

In 2002, for example, new claims for unemployment dropped to 397,000 the first week of January. Apart from a one-week pop to 479,000 in March, the level stayed in a narrow range of 378,000 to 429,000 the rest of the year. Claims averaged a bit of 400,000.

During 2002, payrolls fell seven of 12 months, and dropped a net 540,000 for the year for an average decline of about 45,000. The situation remained similar through early 2003, as claims averaged a bit above 400,000 and small job losses persisted.

It wasn't until October 2003 that payrolls started to trend steadily higher.

By then, new claims for unemployment had dropped consistently below 400,000 per week. It wasn't until claims dropped to the 350,000 level that payrolls started to increase steadily.

The current new claims levels of 600,000 or more are thus a long, long way from the historical indicator of steady gains for payrolls.

It is not until new claims drop down below 500,000 that any significant improvement in the labor market could be suggested. Even at that level, further job losses and rising unemployment is likely. (Claims did not even rise above 500,000 during the 2000-1 recession).

Claims probably have to drop back down to the 400,000 to 450,000 level before the job market can be determined to have even stabilized.

That is still a long, long ways off.

The trend in payrolls appears positive for the economy, but should be seen as moving from horrible to not-quite-as bad, rather than as an underlying trend that will continue.

If new claims stay near 600,000 for the next two reports (including the week of June 12 in which the payroll survey is taken), a large decline in June payrolls is likely. It could well exceed the 345,000 payroll decline in May. That might send a wake-up call to not expect a significant improvement in payrolls from current levels.

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