Downtick in Unemployment; Pickup in Productivity

First, today, a couple of you have written nice notes lately, telling us that our discussion, particularly of health care, was "clear and easily understood" and that we had managed "not to sound like either a cheerleader or a naysayer". We find these comments very gratifying and we thank you for offering them. This is exactly what we're trying to do: help you understand and get some context for complex issues. In this regard, if there's ever anything you DON'T understand, let us know right away, and if we misspeak, let us know that really fast!

We'll have more to say on health care very soon. In the meantime, it's been several weeks since we talked about the economy, and since there was just another employment report from the Labor Department, we want to give some update.

Official "Unemployment" Declines in July
The unemployment rate actually went down in July, to 9.4% from 9.5% in June. We heard a Congressman on TV Friday night assert that the numbers had been massaged to achieve this result, but it's highly unlikely that there were any dirty tricks. These data come out of a survey sample of about 60,000 people* around the country; the figures have long history and are closely monitored, both in and out of the government. You can have a high degree of confidence in their quality. What did happen was that 422,000 would-be workers pulled out of the labor market in the month, so that even though 155,000 workers lost their jobs, the number of people reported as officially "unemployed" also fell. While we might bemoan the artificial light this arithmetic puts on the final ratio, it's also significant that other measures of unemployment also fell. The number of "discouraged workers" has been flat for three months, so that a broader measure of unemployment that includes them edged back from 10.8% to 10.7%. Also, employment in this survey of workers is seeing a moderation in its decline, with the last four months averaging 212,000, compared with 814,000 per month the previous four months.

One other comment about these: the number of workers filing for unemployment insurance, a completely separate tally, conducted weekly by a different Labor Department office through reports from state employment agencies, has also been declining. This led some business economists to forecast that the monthly unemployment rate might actually stabilize or go down. So there's some substance to the less-bad labor force news, and not just smoke and mirrors.

Payroll Jobs Have Smallest Cut in 11 Months
The Labor Department conducts still another compilation of jobs data in which they survey the payroll departments of a large sample of companies to inquire about the number of people they employ. That measure of payroll employment declined by 247,000 in July, the smallest decrease since August 2008. Part of this relative improvement came from the re-opening of Chrysler plants that had been closed during their bankruptcy proceeding in June. But even apart from that factor, fewer job cuts compared favorably with much bigger numbers back in the winter and early spring, especially in such industries as finance, business services and leisure and hospitality. Jobs in this last sector actually rose by 9,000 in July. Apparently, if people can, they're still wanting to play and take vacation. And maybe it was helped by the Episcopal Church's General Convention, which occurred during the week when the data were collected! [That's not totally a joke. It took a lot of people to run that convention center as well as the convention itself. Our meeting surely didn't hurt the travel industry at an otherwise rough time.]

We keep hearing complaints that the fiscal stimulus isn't doing anything. We warned you a couple of months ago that media and others would be impatient. We hope just this discussion of the employment data show that there's some improvement. It isn't great, and people will probably return to the labor force before there are many new jobs to be had, so the unemployment rate is quite likely to rise again, perhaps to over 10%. But we need to walk before we can run into a recovery.

Higher Productivity Lays Base for Renewed Growth
Another precursor to recovery has fallen into place. Reported just this morning, "productivity" in the second quarter surged at a 6.4% rate, the strongest gain since the middle of 2003. Companies laid off so many people in the face of the collapse in business that total hours worked fell more than total output, raising output per hour markedly. This cut production costs sharply both in total and per unit of output. So profits have started to recover after a dramatic plunge in the fourth quarter 2008, the steepest, most chaotic part of the recession. More profits data will come at the end of the month, but the important point now is that a necessary condition has emerged for renewed growth in output and the workforce. Until companies' cash flow turned around, they couldn't begin to anticipate spending more money on production. At the same time, we caution, the higher productivity – that is, more output per unit of labor input – means that output will need to expand for a while before new hiring is likely to begin. I know, we're impatient. But businesses operating on a lower-cost basis will be much healthier going forward, yielding a more solid, sustainable recovery.

__________________

*corrected from 70,000 mentioned in original post.