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More cold water for Friday's labor report

Monday, August 10, 2009

One of my favorite economists (a group that could probably be counted on one hand), James Hamilton of the University of San Diego, takes a look at last Friday's labor market data.

I first called attention to the favorable turn in new claims for unemployment insurance on April 9, noting that in each of the previous 6 recessions, an economic recovery began within 8 weeks of the peak in new claims.
Many cheered Friday's BLS release showing that nonfarm payroll employment fell by 247,000 workers in July, the smallest drop since August, 2008. But the problem is, if a traditional economic recovery had actually begun in June (8 weeks after the April peak in claims), the number of people with jobs should have increased in July rather than fallen by another quarter million.

To put this in perspective, I took a look at where nonfarm payroll employment stood relative to where it had been at the time of the peak in unemployment claims for the current and each of the previous 6 episodes. I calculated the percentage change (measured as the change in the logarithm) in nonfarm payrolls between the month of the claims peak and the value 3 months later ... The current episode, in which employment has fallen by 0.75% since the April peak in new claims, is a clear outlier, even relative to the "jobless recoveries" of 1991 and 2002.
Recall that the spring peak in initial jobless claims was one of the major justifications for the spring stock market rally, a rally that looks as though it wants to run all the way thru 2010.


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