Job Market Is Flashing Many Warning Signs

From the Wall St Journal | July 10, 2009

Investors would like to take comfort in the conventional view that unemployment is a lagging indicator -- that stocks can recover even if employment doesn't.

But that view focuses too much on the unemployment rate and not on other job-market gauges. It also ignores evidence that this recession may simply defy history.

One key labor measure, new claims for government unemployment benefits, is in fact a leading indicator. Jobless claims tend to peak two months, on average, before recessions end. The Labor Department releases fresh claims data Thursday morning. Economists, on average, think claims slipped to 610,000 last week from 614,000 the week before.

Claims apparently peaked in late March at 674,000, suggesting the recession should end any second now. But claims typically fall fairly sharply after peaking. Instead, they have hovered above 600,000 for an unprecedented 22 consecutive weeks.

The behavior of claims suggests a rousing economic recovery isn't yet on the way. That view is bolstered by two other forward-looking labor gauges -- the employment of temporary workers and hours in the average workweek -- which are still worsening, offering little hint of relief.

Payrolls, meanwhile, are a coincident indicator. That is why the National Bureau of Economic Research uses them to help declare when recessions begin and end. They are still in their deepest slump in 50 years.

The unemployment rate does typically lag behind economic recovery, partly because long-discouraged workers, heartened by news of an upturn, start to seek work again, putting themselves back in the ranks of the officially "unemployed."

But unemployment and many other labor measures are at their worst levels in decades. Even when the recession ends, a weak job market will be especially destructive to future growth because the credit crisis has made it harder for households to borrow their way through a stretch of joblessness.

Until the past month or so, stock investors ignored the upward march of the unemployment rate, confident the economy would be humming before that number started to move downward. Now with the rally stalled on worries about a recovery, investors would be mistaken to ignore a weak job market.

Email: tape@wsj.com