A Sputtering Economy?

The employment situation July release indicated a decrease in overall payroll employment. Does this outcome indicate a sputtering* economy

Definitely, several indicators are signalling a slowing economy. Two protagonists in the debate over the extent of the deceleration are highlighted in today’s NYT. In this post, I want to focus on the labor market indicators. First, it’s important to differentiate between the headline number and the one excluding temporary workers associated with the decennial Census.

Figure 1: Log nonfarm payroll employment, seasonally adjusted (blue line), private sector employment (red line), private sector aggregate weekly hours index (green line), all seasonally adjusted, normalized to 0 at 2007M12. Gray shaded area indicates recession, assuming trough at 2009Q2. Source: BLS via FRED, NBER and authors calculations.

Private sector employment is rising, albeit anemically, given the depth of the recession. More importantly, aggregate weekly hours in the private sector are still trending upward. That indicator is up 2.2% relative to the 2009M10 trough (for an annualized growth rate of 3.8%, in log terms). Hence, the private sector is still creating jobs, which is an important consideration if one is concerned about the self-sustaining nature of the recovery.

None of this denies the importance of government employment — including those temporary workers associated with the decennial Census. That additional employment injected additional spending into the economy. More importantly, total government employment is declining. As Figure 2 illustrates, this decline is being driven almost entirely by state and local employment. WSJ RTE documents this trend.

Figure 2: Total government employment, in thousands, seasonally adjusted (blue line), excluding temporary Census workers (red line), state and local government employment including education (green squares). Gray shaded area indicates recession, assuming trough at 2009Q2. Source: BLS via FRED, BLS July 2010 release, NBER and author’s calculations.

A regression of the change in total government employment ex.-Census on the change in state and local employment, over the 2008M12-2010M07 period, yields a regression coefficient of 1.07, adj-R2 = 0.79.

So we have continued momentum, albeit of a lackluster sort, in the private sector employment. However, with continued contraction in the state and local government employment, one cannot be assured that the private sector will continue to create jobs. That’s why the reluctance of the Congress to approve additional transfers to the states was such a foolhardy one, as I argued a month ago here. It’s as if some policymakers want to drive the economy into the ditch. In other words, it’s in our power to prevent a sputtering economy from becoming a stagnant or recessionary economy.

Additional discussion of the employment release here: NYT, CR1, CR2, WSJ RTE, CBPP.

* Credit to Laura Schwendinger who kept on saying this adjective was the most apt description of the economy — and right now I think she’s right!

A Sputtering Economy?

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