Why the jobs report is so ominous
There's little chance that this is a statistical fluke. We'll wish it had been.
NEW YORK (Fortune) -- What gives today's October employment report an unmistakably ominous twist is the almost uniformly downbeat message from nearly all of its components. No matter how deep one digs into the specifics of the data, it is hard to identify any encouraging news. Not only did the economy lose a massive 240,000 jobs in the non-farm sector, but the previously reported declines of 159,000 in September and 73,000 in August were revised sharply lower to 284,000 and 127,000 respectively as well. As a result, the economy has now lost a total of 1.2 million jobs since the beginning of the year, with nearly half of those losses occurring in the last three months alone, pointing to an acceleration in the pace of erosion in labor markets.
Losses were widespread in all of the key categories except the government sector, which gained 23,000 last month. Manufacturing jobs were down by 90,000 for a cumulative decline of over 200,000 in the last three months, while construction jobs fell by 49,000 last month, for a total decline of over 100,000 in the last three months. Jobs in the retail trade sector declined by 38,000, down by 111,000 in the last three months. That downbeat message goes on and on in most of the other categories.
The unemployment rate hit 6.5% for the month, up by 0.4%, which was double what most economists expected and its highest level since 1994. There is little chance that the bleak numbers are a statistical fluke. Here's why: Since the payroll data and the unemployment rate are the results of two separate surveys conducted by the Bureau of Labor Statistics (www.bls.gov), those two series sometimes send a mixed message about the state of labor markets for a particular month because of the statistical noise associated with the methodology of those surveys. However, in a dramatic demonstration of consistency in October, both the jump in the rate and the sharp declines in payrolls sent a very powerful message that labor markets are deteriorating precipitously.
1) By way of comparison, in the 2001 recession and the period of sluggish growth that immediately followed in 2002-03, the unemployment rate reached a peak of only 6.3%, in June 2003. So, we have already exceeded that mark and, given that we are still in the early phase of the current recession, the unemployment rate should be expected to push toward the 7.5% range over the next 3 to 6 months, and possibly higher.
2) Given that the surveys that the BLS conducts take place during the week that includes the 12th of the month, many of the corporate layoff announcements that have made headlines in recent weeks were not captured in the October data. As a result, we should look for further sizable job losses to be posted in the employment reports for November and December - and beyond - as companies continue to adjust to the bleak economic environment.
3) Any doubt that we're officially in a recession can be put aside. Fourth-quarter real GDP is likely to contract sharply. The rapid deterioration of labor markets points to a sharp decline in hours worked and output in the fourth quarter. This is likely to lead to a decline in personal consumption to the tune of 5% or so for that period. Since that makes up about 70% of the economy, the stage has already been set for real GDP to shrink at a more than 4% rate in the fourth quarter.