With the global economy projected to grow at a rate well below pre-crisis levels and permanent output loss likely, demand for labor will remain weak. In addition, the U.S. focus on export growth and the Euro area’s low productivity levels will further hurt labor demand.
Unemployment Rises Above Previous Recession’s Levels
Unemployment rates and total job losses are reaching levels with few historical parallels.
- Current U.S. unemployment, which reached 9.8 percent in September, is significantly higher than the 2001 recession’s peak of 6.3 percent. Euro area unemployment—at 9.6 percent in August—reached its highest rate since March 1999. Unemployment rates in Spain (18.9 percent) and Ireland (12.5 percent) were particularly high.
- The United States lost 7.2 million jobs in the past 21 months, significantly more than the 2.7 million jobs it shed in the 30 months from March 2001 (the beginning of the 2001 recession) to August 2003 (the last month of job losses from that recession).
Labor Market Remains Weak
- U.S. job openings fell by 21,000 to 2.39 million in August, reaching the lowest level in nine years and marking a 50 percent contraction from the July 2007 peak. Japan’s job-to-applicant ratio reached a record low of 42 vacancies for every 100 applicants in August.
- Wages in the United States fell 5.2 percent (y/y) in August, rising only slightly from June levels.
Slow Global Growth Limits Labor Demand
Stabilizing inventories and business investment and gradually improving housing markets are underpinning current global growth. However, consumer demand has yet to rise significantly and some indicators have even fallen off recent highs.
- The IMF projects world activity will grow 3 percent in 2010 after contracting 1 percent in 2009. This is a very weak recovery by historical standards.
- The most recent production data is mixed. China’s composite Purchasing Managers Index (PMI) fell to 57.8 in September, from a 23-month high in August, reflecting slowing growth. A reading above 50 represents expansion; one below 50 implies contraction.
- South Africa’s PMI is still contracting, despite increasing from 39.3 in August to 48 in September, the biggest rise in 17 months. On the other hand, the Euro area’s composite PMI bumped up from 50.4 in August to 51.1 in September.
U.S. Focus on Exports Will Temper Labor Demand
With U.S. consumers remaining cautious and the United States focusing on export growth, manufacturing will benefit, but services will grow more slowly.
- U.S. exports of goods and services increased by 0.2 percent (m/m) in August, marking the fourth month of export growth. This week, the dollar fell to its lowest level relative to the Euro since the collapse of Lehman Brothers, helping the U.S. export outlook.
- Contrary to past recoveries, in which growth in services, not manufacturing, provided new jobs, U.S. manufacturing expanded for the second consecutive month in September, with a PMI of 52.6, while services expanded for the first time in 11 months, with a non-manufacturing index of 50.9.
- Even as manufacturing expands, employment in the sector, which is increasingly capital-intensive, continues to shrink. The Institute of Supply Management’s Employment index was below 50, at 46.2, in September, marking the 14th consecutive month of contraction.
- With Consensus Economics projecting an unemployment rate of 9.8 percent in 2010, U.S. unemployment is not expected to fall in the near-term.
Low Productivity Hurts Euro Area Workers
Euro area policies limited layoffs during the recession but, as output fell, these policies came at the expense of worker productivity. As the economy recovers and output rises, businesses will likely demand higher productivity rather than hire more workers.
- Productivity in the Euro area has been falling sharply since the third quarter of 2008, with the most recent data showing a decline of 3.6 percent (y/y) in the second quarter of 2009.
- According to Consensus Economics, Euro area unemployment will rise to 10.8 percent in 2010.
Underemployment Weakens Labor Recovery
The number of underemployed individuals—part-time workers who would rather hold a full-time position and people who want work but have given up looking—is at a record-high. In addition, as Euro area job-supporting polices expire, new waves of layoffs will continue to drive up the labor supply.
- In September, 9.2 million part-time workers in the United States would have preferred a full-time position. An additional 706,000 individuals, up 239,000 from a year earlier, were no longer looking for work because they believed no jobs were available, bringing underemployment to a record high.
- Spain’s jobless claims rose 2.4 percent (m/m) in August as stimulus efforts faded, highlighting the drag that follows when job-supporting policies end.
Encouraging Recent News
Labor markets in Japan, Germany, Australia, and Canada improved recently and U.S. job losses slowed.
- Japan's jobless rate unexpectedly fell from a record high of 5.7 percent in July to 5.5 percent in August.
- Germany's unemployment rate fell to 8.2 percent in September, down from 8.3 percent one month earlier.
- Australia's jobless rate fell 0.1 percent from August to 5.7 percent in September.
- Canada gained 31,000 net new positions, marking the second straight increase, and unemployment dropped from 8.7 percent in August to 8.3 percent in September.
- The pace of job losses moderated in the United States, with new claims for unemployment insurance dropping to 521,000 last week, down from 554,000 the previous week, marking the fourth drop in five weeks and contributing to the lowest four-week average since January.
Monetary Policy Tightened and Financial Markets Improved
- Australia became the first G20 country to follow Israel’s interest-rate-raising example, increasing its rate 25 basis points to 3.25 percent last week.
- The European Central Bank (ECB) held interest rates at 1 percent. ECB President Jean-Claude Trichet explained that there is little inflationary pressure “in the near term.”
- The president of the St. Louis Federal Reserve said U.S. interest rates must not rise until unemployment eases, though other Federal Reserve presidents have indicated that they believe inflation will become the bigger threat.
- Equity markets improved this week, with the Dow Jones up 4.2 percent, the FTSE 100 up 4.5 percent, and the Nikkei 225 up 3.5 percent since October 5. However, some analysts are becoming concerned that the recent surge has outpaced the economic recovery.
Looking Ahead
For an update on the U.S. job market, look for the release of this week’s initial jobless claims on Thursday, October 15.
