The Job Numbers, Part 1

Here's the question I posed earlier in the week:

Will the downturn be short and shallow or deep and vicious? With all apologies to William Shakespeare, that is the question. It isn't an idle one, either, and it's difficult to answer with any degree of confidence even though it's increasingly clear the Federal Reserve has succeeded in its several months-long campaign to prevent a credit crunch from turning into a financial collapse. The quarter-point cut Apr. 30 in its benchmark interest rate to 2% is probably the central bank's last maneuver in that crusade for some time.

Even though the risk of apocalypse has been averted, the economic glass could be half empty. Perhaps most worrisome is the nearly 13% price decline in residential homes from a year earlier in 20 major metropolitan markets followed in the Standard & Poor's/Case-Shiller index. The housing market's downward momentum shows no signs of abating.

The government's latest gross domestic product report has business spending falling across the board, with outlays on residential and non-residential construction, capital goods, equipment, and software down in the first quarter of 2008. Consumer confidence is falling, too. One figure in the Conference Board's April report caught the eye of Bernard Baumohl, managing director of the Economic Outlook Group in Princeton , N.J. The proportion of people surveyed who expect their incomes to rise over the next six months fell to 15.1%, "the lowest percentage this organization recorded since 1967 when it began this line of questioning," he writes.

Still, there is a chance the glass is half full. Take the stock market. It's barely in correction territory, down less than 11% from its peak reached in October, 2007. The Bush Administration's $168 billion rebate to taxpayers will start reaching consumers soon, with at least some of that money spent at malls and big-box stores. The forward earnings of the S&P 500 are down only 5.4% at the end of April from last October's record high, according to economist Edward Yardeni of Yardeni Research. That compares to a 17.5% peak-to-trough decline during the previous profits recession at the beginning of the decade, he adds.

So, half empty or half full? The April employment report due out on May 2 could provide an answer. "Central to the outlook for the economy in the balance of this year is just how much has the job market weakened," says James Paulsen, chief investment officer at Wells Capital Management, which is part of Wells Fargo.

Certainly, last month's payroll plunge of 80,000--the biggest drop in five years--convinced a majority of private sector economists that the U.S. was in a recession or sliding toward one. (A close look at the numbers behind the 0.6% gain in GDP in the first quarter of 2008 won't persuade many economists to change their outlook.) Jobs matter.

One key measure is simply, how big is the payroll drop? The Bloomberg survey of economists for April's employment report has a consensus decline of -75,000. That figure would be consistent with a business community facing tough times but reluctant to embrace mass layoffs. If payrolls come in around consensus that would suggest a short, shallow recession, says Mark Zandi, chief economist at Moody's Economy.com. (He's forecasting a 100,000 decline.)

What if the job number jumps to the 150,000 to 200,000 level? Those figures are consistent with the job market of a typical post-World War II recession. Assuming history holds, the downturn would come to an end around the time summer shades into fall. But payroll declines in the 250,000 to 300,000 range would suggest a vicious downturn. The recovery wouldn't start until the end of the decade, Zandi says.

It's not just the magnitude of the payroll drop that matters. Who gets handed a pink slip also counts when trying to fathom the economy's direction. So far, this has been largely a blue-collar and pink-collar downturn. Job losses have been concentrated in industries such as manufacturing, construction, and retail, and it's the less-educated workers in these industries that are suffering the most on the job front. For instance, the unemployment rate for workers with less than a high school diploma is up from 7.6% in December to 8.2% in March. Workers with a high school diploma have also seen an increase over the same time period, from 4.7% to 5.1%.

In sharp contrast, workers with a bachelor's degree or higher are doing relatively well, despite massive layoffs at a number of beleaguered financial institutions. For example, the unemployment rate for well-educated workers fell a fraction from December to March—2.2% to 2.1%. Watch out if the job-loss figure spreads to better-educated and better-paid workers in such white-collar professions as health care, education, and information technologies.

In a sense, everything flows from jobs. The more confident workers are that they won't join their neighbor at the unemployment center, the quicker home prices and consumer spending revive. Of course, the exact opposite dynamic holds, too.