Economic Jolt: Job Openings and Labor Turnover January 2008

Today the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 9.67%, job “hires” declined 11.25%, and “separations” declined 6.60% led by a 8.51% drop in “quits”.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for five consecutive months strongly suggesting that the private sector is planning to curtail future hiring activity.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with December’s results posting the eighth straight decline on a year-over-year basis further confirming the recent weakness seen in the job market.

Job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), are also declining primarily due to the inclusion of “quitting” activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with recent weakness showing some of the sharpest declines on a year-over-year basis seen since August of 2003.

Economic Jolt: Job Openings and Labor Turnover December 2007

This week the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 8.27%, job “hires” declined 9.80%, and “separations” declined 5.06% led by a 11.20% drop in job“quits”, the largest year-over-year decline to voluntary “quitting” activity seen since August 2003.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for five consecutive months strongly suggesting that the private sector is planning to curtail future hiring activity.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with December’s results posting the eighth straight decline on a year-over-year basis further confirming the recent weakness seen in the job market.

Job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), are also declining primarily due to the inclusion of “quitting” activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with the sharpest decline on a year-over-year basis seen since August of 2003.

Envisioning Employment: Employment Situation December 2007

Today’s Employment Situation Report again showed declining growth to employment with both the Household and Establishment data indicating anemic conditions with only a 18K increase to non-farm payrolls, a 436K worker decline in civilian labor force employment, a 474K increase to unemployed workers, 179K increase to workers now not in the labor force, increasing the rate of unemployment at 5.0% rate, the highest rate seen since the fall of 2005.

The report also disclosed continued and even peaking below trend growth overall and substantial declines in sectors directly related to residential real estate.

The following chart combines both the “residential building” and “residential specialty trade contractors” into one payroll series and then plotting the data since 2002.

Notice that, in aggregate, these payrolls, having peaked in March 2006 and declined 6.83% or 293,100 jobs since then, appear to be headed lower.

Also note that independently, “residential building” has lost 6.14% of its payrolls or 84,900 jobs since it peaked during September 2006 and that “residential specialty trade contractors” have lost 7.74% of its payrolls or 224,300 jobs since it peaked during February 2006.

Next, let’s take a look a slightly broader set of industry sectors that have been directly impacted both by the housing boom and now the bust (click for larger chart).

Note that I carefully selected sectors that showed either an obvious expansion-to-contraction trend OR a flattening-to-contraction trend and that ALL sectors have both a historical and logical relationship to residential housing as well as recent industry press releases disclosing declining profits as a result of the housing bust.

As you can see, sectors that are now being directly impacted by the current housing decline are numerous and cut across many levels of the job market from construction and materials to manufacturing and finally to retail.

Combining these series into an aggregate of payrolls “directly impacted” by the housing boom and bust cycle and plotting it, along with the S&P/Case-Shiller Composite Home Price Index (click on chart below for larger version) since 1997 provides some pretty solid evidence that a relationship exists.

To expand the analysis a bit look at the following chart that shows percent change on year-over-year basis to BOTH the “directly impacted” payrolls sectors and ALL private non-farm payroll overlaid with the S&P/Case-Shiller Composite Home Price Index.

As you can see, the “directly impacted” payrolls are declining at an increasing rate and that overall private non-farm payrolls, while continuing to increase, are doing so at a declining rate.

To get a sense of the relative intensity of the pullback to the “directly impacted” payrolls by plotting both the percentage of overall private non-farm payrolls that the “directly impacted” aggregate represents as well as the contributions it is making to the rate of change of the underlying total private non-farm payrolls.

Notice that at its peak the “directly impacted” payrolls represented over 6.6% of Total Private Non-Farm Payrolls and now contracted to a degree similar to that seen during the entire course of the 2001-2003 contraction.

Plotting the ratio of overall and private non-farm payroll as well as the payroll of various business sectors to overall non-institutional population (above 16 years old and not in jail or “juvee”), the last eight years seem to pose more questions than answers.

The payroll-population ratio concept simply provides a mechanism for better isolating the changes to payroll rosters by calculating the percentage of population that is employed in a given sector at any given time.

In the following chart (click for larger version) you can see the ratio of overall non-farm payroll and private non-farm payroll to non-institutional population from 1948 overlaid with all U.S. recessions in that period.

As you can see, there is a fairly strong correlation to declining percent of population employed in non-farm and private non-farm endeavors and recession with particularly good peak-trough alignment for all recessions prior to 1990.

During the 2001 recession (and to a far lesser extent in 1990), although there where large declines to the ratio during the official recession period, the economy seemed to be able resume growth while the ratio continued to slide or stayed well below the peak of the prior expansion.

This is an interesting situation in that, although increases in population have been steady and could have replenished the literal number of jobs lost during the downdraft of 2000-2003, the latest expansion of payrolls has not been strong.

The following chart (click for larger version), on the other hand, the payroll ratio related to construction has remained above even the peak set in the 90s expansion but now seems to be coming down.

As you can see, although 3.21% of the population currently is employed in a construction occupation, there is a chance that this percentage could drop below the trend resulting in 2,327,150 lost construction jobs for every 1% drop in ratio.

Of course these lost jobs could shift to some other part of the labor force but the point is, the current ratio appears poised to drop and with it will inevitably go many construction jobs.

Envisioning Employment: Employment Situation November 2007

While today’s Employment Situation Report showed growth to total non-farm payrolls it also disclosed continued and even peaking below trend growth overall and substantial declines in sectors directly related to residential real estate.

The following chart combines both the “residential building” and “residential specialty trade contractors” into one payroll series and then plotting the data since 2002.

Notice that, in aggregate, these payrolls, having peaked in March 2006 and declined 6.45% or 221,900 jobs since then, appear to be headed lower.

Also note that independently, “residential building” has lost 5.75% of its payrolls or 59,100 jobs since it peaked during September 2006 and that “residential specialty trade contractors” have lost 7.65% of its payrolls or 185,900 jobs since it peaked during February 2006.

Next, let’s take a look a slightly broader set of industry sectors that have been directly impacted both by the housing boom and now the bust (click for larger chart).

Note that I carefully selected sectors that showed either an obvious expansion-to-contraction trend OR a flattening-to-contraction trend and that ALL sectors have both a historical and logical relationship to residential housing as well as recent industry press releases disclosing declining profits as a result of the housing bust.

As you can see, sectors that are now being directly impacted by the current housing decline are numerous and cut across many levels of the job market from construction and materials to manufacturing and finally to retail.

Combining these series into an aggregate of payrolls “directly impacted” by the housing boom and bust cycle and plotting it, along with the S&P/Case-Shiller Composite Home Price Index (click on chart below for larger version) since 1997 provides some pretty solid evidence that a relationship exists.

To expand the analysis a bit look at the following chart that shows percent change on year-over-year basis to BOTH the “directly impacted” payrolls sectors and ALL private non-farm payroll overlaid with the S&P/Case-Shiller Composite Home Price Index.

As you can see, the “directly impacted” payrolls are declining at an increasing rate and that overall private non-farm payrolls, while continuing to increase, are doing so at a declining rate.

To get a sense of the relative intensity of the pullback to the “directly impacted” payrolls by plotting both the percentage of overall private non-farm payrolls that the “directly impacted” aggregate represents as well as the contributions it is making to the rate of change of the underlying total private non-farm payrolls.

Notice that at its peak the “directly impacted” payrolls represented over 6.6% of Total Private Non-Farm Payrolls and now contracted to a degree similar to that seen during the entire course of the 2001-2003 contraction.

Plotting the ratio of overall and private non-farm payroll as well as the payroll of various business sectors to overall non-institutional population (above 16 years old and not in jail or “juvee”), the last eight years seem to pose more questions than answers.

The payroll-population ratio concept simply provides a mechanism for better isolating the changes to payroll rosters by calculating the percentage of population that is employed in a given sector at any given time.

In the following chart (click for larger version) you can see the ratio of overall non-farm payroll and private non-farm payroll to non-institutional population from 1948 overlaid with all U.S. recessions in that period.

As you can see, there is a fairly strong correlation to declining percent of population employed in non-farm and private non-farm endeavors and recession with particularly good peak-trough alignment for all recessions prior to 1990.

During the 2001 recession (and to a far lesser extent in 1990), although there where large declines to the ratio during the official recession period, the economy seemed to be able resume growth while the ratio continued to slide or stayed well below the peak of the prior expansion.

This is an interesting situation in that, although increases in population have been steady and could have replenished the literal number of jobs lost during the downdraft of 2000-2003, the latest expansion of payrolls has not been strong.

The following chart (click for larger version), on the other hand, the payroll ratio related to construction has remained above even the peak set in the 90s expansion but now seems to be coming down.

As you can see, although 3.25% of the population currently is employed in a construction occupation, there is a chance that this percentage could drop below the trend resulting in 2,327,150 lost construction jobs for every 1% drop in ratio.

Of course these lost jobs could shift to some other part of the labor force but the point is, the current ratio appears poised to drop and with it will inevitably go many construction jobs.

The following is a list of other individual sectors and I’ll leave it up to you to interpret the results but by all means, comment with opinions.

I’ll try to offer some better analysis in a layer post.

The Almost Daily 2¢ - Backdropping the Backdrop

In anticipation of Friday’s release of the latest read on the employment situation, this post, along with the next several daily posts, will attempt to present a progression of analysis seeking to shed more light on issues surrounding the present state and future prospects of the job market.

First, to get a sense of what’s at stake here, envision some of the key problematic elements that we know to exist in our economy today, namely nationally declining property values, upwardly resetting mortgage interest rates and a nearly complete absence of commercial lending all working together to trap a large cohort of homeowners, especially from 2000-2006 vintages, in an unprecedented state of financial stress resulting in a significant loss in confidence, a material pullback in consumption, and soaring rates of foreclosure activity.

If there was ever a time when a down-shift in employment could spontaneously spark the self-reinforcing tinder of a widespread recessionary conflagration, this must be it.

But as we all must doubtlessly “know” or, at least, have been made repeatedly aware by the traditional media, all this current turmoil had, until now, come amidst the “backdrop” of a strong labor market.

Yet, considering the less-than-fundamental circumstances that drove the expansion of the housing boom, the labor market weakening as a result of the housing bust and not the other way round should come as no surprise.

The financial engineering that brought forth a bounty of no-money-down, no-doc, low-doc, neg-am, sub-prime toxic ARM, HELOC, teaser rate and cheap jumbo loans was a nationwide phenomenon and as such, infected all property markets with equal inflationary ferocity.

Now, post-collapse, these very same markets and, more importantly, their participants, are left to navigate their way through the aftermath resulting in, in all likelihood, a continued shortfall in demand for luxury, discretionary and even non-discretionary comforts as the remaining borrowers that are prepared to service their debt obligations hunker down.

This hunkering down, be it forced or of one’s own volition, is the essential element driving an unwinding of the consumption machine that, when taken full course, will likely dictate a significant restructuring of the business of both producers and service providers.

So, three interesting aspects of our labor market that warrant some investigation in order to better understand current and future outlook are as follows:

1.) What, to date, has been the direct impact of the housing decline on the labor market including fallout from construction, real estate services, building materials, home furnishings, home services and retail?

2.) What might be the extent of job losses related to corporate restructuring in preparation for and as a result of a prolonged recession?

3.) Can the recent expansion of net exports serve to buoy the economy, drive job creation and offset the effects of a protracted domestic slowdown?

In upcoming posts, Ill attempt to provide some data that may help to provide a basis for drawing some conclusions for these basic questions but for now, let’s look at the current breakdown (click for larger charts) of both the total labor force given by the BLS household survey data and non-farm payrolls given by the BLS establishment data.

As you can see, the US is truly a service economy and that fact will likely play an important role in any forthcoming restructuring.

Envisioning Employment: Employment Situation October 2007

In an effort to gain some further perspective on the impact the housing decline could be having on the wider economy, I have added the Bureau of Labor Statistics (BLS) monthly Employment Situation report to the lineup of recurring posts.

Ill expand the lineup of charts in future posts but for now, as a baseline, let’s look at the course that non-farm employment has taken (click for larger version) since 2003.

Notice first that during the early months of 2003 jobs were still contracting a bit presumably in the wake of the dot-com recession and 911 turmoil but then bottomed that summer and turned up for the remainder of the year and has remained in a growth phase ever since.

Also note that this chart captures four separate data-points per month.

The Monthly Initial Result is the value first published in the monthly Employment Situation report while the Monthly “Revised” result is the final revision for that month settled three months later.

The “Annual” Revised Result is published in the January Employment Situation report and revises every month in the prior year.

Finally, the “Final” Revised Result is the value currently published as part of the BLS historical data.

This is a typical routine as the BLS first publishes a monthly result, then revises it over the next two months, then revises the whole year at the beginning of the next year, and finally revises the whole historical series as underlying components are revised.

Notice that in November and December of 2006 there were two dramatic upward revisions that added nearly 1.5 million jobs and that initially the data looked very unusual.

Then in the January 2007 annual revision, the BLS revised back every month in 2006 making the discrepancy less apparent.

Finally, with the “Final” historical revision the data was revised even further making the trend line look fairly well synthesized.

The moral of the chart is only this, the monthly BLS jobs data is VERY subject to revision so use caution before drawing any conclusions one way or the other.

In future posts, I’ll continue to track the revisions as well as break out construction jobs and add other housing related analysis.