Understanding the Market

In an earlier essay I tried to explain President Obama’s notion of saving or creating jobs.  The stimulus plan bill was passed by both houses of Congress last night and the final plan was a bit smaller than the earlier version, so the President now asserts that the plan will save or create 3.5 million jobs.

This post will track the 3.5 million jobs.  There are a number of ways to measure jobs in the US.   Some people work several different jobs at a time while others change employers frequently, so measuring jobs is not as simple as it might seem.  There was a cartoon from the Clinton era showing the President speaking at a dinner that he had created 8 million jobs and an overworked waiter thinking that he had three of them.  Obama’s economic team define jobs as use the payroll data (see here for their original report).

Just before the stimulus bill passed the Department of Labor issued a report (see here).  The number of people working (see Table B1, about 2/3 of the way down, with the heading “Establishment Data”) was 134,580,000 (seasonally adjusted).  This is a preliminary measure and will be revised next month and probably revised again in a year.  Using the Obama team methodology , without the stimulus bill employment would be expected to fall by around 1,613,000 jobs during the next two years so that without the stimulus bill we would expect employment to be 132,967,000 in January 2011.

With the revised estimate of 3,500,000 jobs “saved or created”, employment should be 136

,467,000, creating 1,887,000 in addition to the 1,613,000 jobs saved.

[Note I have revised the table format since the original post to make the tracking easier]

The table below will be updated with every new employment release to see how jobs have changed.  The first column is the actual number of payroll jobs starting with the month before the stimulus plan passed; the second column is the total change in employment since the month when the stimulus plan passed and the third column shows the gap remaining of jobs to be “created” in order to reach the target.

On March 6, 2009, the BLS released the revised January job numbers and the preliminary February numbers. I have revised the table to reflect these data. The loss of 651,000 jobs in February means that there will have to be an increase in jobs of a bit over 2.5 million over the next 23 months (111,000 per month) to reach the target number of jobs.

[update] On April 3, 2009, the BLS released preliminary March data (the change in February was unrevised). The loss in jobs means that there will have to be an increase in jobs of 3.2 million (148

,000 per month) in the next 22 months to reach the target.

[update] On May 8, 2009, the BLS released preliminary April data. The loss in jobs means that there will have to be an increase in jobs of 3.8 million (181,000 per month) in the next 21 months to reach the target.

[update] On June 5, 2009, the BLS released preliminary May data. The loss in jobs means that there will have to be an increase in jobs of 4.1 million (194,000 per month) in the next 20 months to reach the target.

[update] On July 3, 2009 the BLS released preliminary June data. The loss in jobs means that there will have to be in an increase in jobs of 4.5 million (225,000 per month) in the next 19 months.

[update] On August 7, 2009 the BLS released preliminary July data. The loss in jobs means that there will have to be an increase of jobs of 4.7 million over the next 18 months to reach the target.

[update] On September 4 , 2009 the BLS released preliminary August  data. The loss in jobs means that there will have to be an increase of jobs of 5 million over the next 17 months to reach the target.

[update] On October 2, 2009 the BLS released preliminary September data.   The loss in jobs means that there will have to be an increase of jobs of 5.3 million over the next 16 months to reach the target.

[update] On January 8, 2010 the BLS released preliminary December data.  The loss in jobs (following a small revised increase in November) means that there will have to be an increase of 5.3 million jobs over the next 13 months to reach the target.

Technical note:  The Obama team issued their forecast in January before the release of the January employment data; expectations were for January employment to be down around 500,000.  One could infer that the Obama team expected such a job loss and that they actually now expect a loss of only 1.1 million jobs over the next 23 months, changing the number of jobs created relative to jobs saved.  But as I have not seen a revised version of the CEA memo reflecting the 3.5 million number (and in fact the White House still provides links to the 4 millions job memo), I will make the calculations in a way that provides a “best case” to the Obama team.  If there is a revised version of the memo to show the 3.5 million job estimate (with a revised forecast)

, please send me a note to ckendall at-sign umrkt dot com and I will update this page accordingly. [Update May 13, 2009: The President's staff is still using the 3.5 million number, see here in Chapter 2]

The unemployment rate typically continues to rise for a few months after recessions end, but in recent years the timing seems to have changed.  After the end of recessions from 1948 until the 1980s, rapid economic growth followed quickly with a sharp improvement in unemployment.  But after the last two recessions (recessions that ended in March 1991 and November 2001) there was a considerably longer period before the economy grew rapidly and unemployment fell.  This article will document this finding.

During recessions, the economy slows and the rate of unemployment rises. When a recession ends and the economy starts to grow, there is often a period of a few months (or more) until the unemployment rate falls.  I believe that the data indicate that the recession that started in December 2007 probably ended in July or August of 2009 (see here for the data), but the NBER, the agency that determines when recessions end, may not make an official decision until the evidence is much clearer

, probably sometime in 2010 or 2011.

If the recession did end in the third quarter of 2009, when will the rate of unemployment fall?  As I write, in early January 2010, unemployment is around 10%, somewhat higher than it was when the recession ended.  There is a rough rule of thumb that the economy must grow around 3% to generate enough jobs to keep the rate of unemployment constant (see here for a more detailed analysis).  The economy grew at 2.2% in the third quarter of 2009

, so it is not surprising that the unemployment rate continued to rise.

Here is a table that lists the end dates of the postWorld War II recessions, the lag from the end of the recession until the GDP grew above 4% and the change in the unemployment rate in the twelve months following the recession.  The 4% level was chosen as representing a rate of growth sufficient to substantially decrease the unemployment rate.

Sources:  NBER , BEA and BLS (data obtained from FRED).

Following the recession that ended in October 1949 (during the fourth quarter)

, the economy grew at 17.2% in the first quarter of 1950, one quarter later.  Twelve months later, in October 1950, the unemployment rate was 4.2%, 3.7% lower than the 7.9% when the recession ended.

For the period from 1945 to the 1980s, the economy grew relatively rapidly (above 4%) shortly after the recession ended. In the year following all but one of these recessions , the rate of unemployment dropped, usually around 1 to 2%.

If the recession that ended in 2009 were a typical 1940s/1980s recession, then we would expect the rate of unemployment to decline from the 9.7% level in August 2009 to around 8% in August 2010.  But if the recession is of the 1990s/2000 variety, then it would not be surprising to see 9-10% employment in late 2010.