If We Make It Through December
by Brian Pretti CFA, Contrary Investor. November 21, 2008
Merle Haggard is clearly one of country music’s living legends, right there with Willy Nelson. About a year or so back I had the chance to see Merle and The Strangers at the beautifully renovated art deco Cascade Theater in Redding, California (Merle lives in Palo Cedro, right outside of Redding). Many of Merle’s greatest tunes throughout his career have involved the theme of the “workin’ man.” And as I look across the character of the labor markets at the moment, I can’t help but remember the lyrics to Merle’s “If We Make It Through December.” It’s a song about a “workin’ man” laid off down at the factory right before Christmas, and how his little girl doesn’t understand “why daddy can’t afford no Christmas here.” Fitting with where we are in the current cycle? It sure seems that way, given the unrelenting headlines of the moment. This may sound clearly melodramatic, but I’m not so sure one of the most important household focal points in 2009 won’t be a job, let alone stock prices or residential real estate values.
We all know that the character of the US labor market has been weakening for some time now. No mystery and no incredible revelation at all. It’s time for a very quick review of the leading indicators of headline payroll employment. What are they telling us about what lies ahead, despite the weakness we’ve already seen? It just so happens that if we look at monthly payroll additions or losses from a quarterly perspective, the latest combined three months of job losses through October in headline payrolls is a number that has only been seen historically right smack in the midst of official US recessions. But, as always, it’s what is to come that is most important to our decision-making.
Although we’ll be the first to admit that the Challenger layoff announcement numbers are not highly correlated with direct monthly payroll experience, they are worth a peek in terms of both trend and historical perspective. As you can see in the chart below, we’re currently at a level last seen in 2003. And yes indeed, the trend for now is up. Question being, at what heights will this survey peak in the current cycle? Personally, I would not be surprised at all to see a return, even if brief, to peak cycle experience of 2001. We need to remember that 2009 will reflect the economic reality of the fallout we have experienced in the financial and credit markets over the past two to three months. The echo of the markets will resonate throughout the real economy dead ahead. And that experience will not be pretty.
Onward to the key leading indicators of headline payroll employment. And I’ll keep it light on the explanation as I’ve walked through these in a prior Financial Sense discussion. Temp employment. History is clear on the fact that in past cycles rate of change in temp employment has both peaked and troughed ahead of headline payroll trends. The following graph is clear on the concept. For now, the annual rate of change in both temporary and headline payroll employment trends is in near freefall. In the past, freefall experiences usually V bottom. Will it be so again? Just stick around and we’ll find out. When businesses feel confident about the forward outlook, they will test the labor market waters by first hiring temps.
We all know the holidays lie dead ahead. And holiday time usually means at least some type of pickup in the retail employment. After all, what are the holidays for if not shopping, right? (Only kidding, I think.) As you can see below, there has been anything but a pickup in retail employment. The year over year rate of change is pushing multi-decade lows as the nominal body count in retail has been declining rapidly over the last six months.
As you can see in the chart, I’ve gone back and looked at the prior two cycle downturns in retail employment. On average it has been a contraction period of about 2.5 years over the last two cycles. As of now, we’re about a year and one half past the most recent peak. But if you look at the chart a bit more closely, the most recent peak was followed by close to a year of relatively flat retail employment. In terms of the true contraction, we’re maybe 9 months into the real downturn. Still a ways to go before the current cycle completes? If history is any guide, you bet there is. I will admit one caveat as we look at retail employment. Although it has been a great coincident indicator in the past, I’m clearly open to the possibility that in the current cycle that will not be the case. Personally, and it should be no great revelation at all, I expect a very meaningful consumer led recession dead ahead. Of a magnitude we have not seen since the mid-70’s or early 1980’s. There’s a darn good chance retail employment trends are about to lose their coincident labor market indicator role they have played so well for decades. We’ll just have to see what happens.
I’ve always been a fan of the household employment survey that accompanies each establishment, or headline payroll report. Why? Because it has also done a pretty darn good job of leading the headline rates of change at major peaks and troughs. Admittedly, these lead times can be incredibly short in terms of being a few months. Nonetheless, you can see what I’m talking about below. Again, at least as of now, no sign of a turn. Freefall in trend intact.
One final chart and I’ll call it a day. What lies below is a picture of US payroll employment growth by decade since the 1960’s. Interestingly, every single decade since then began with a recession within its first few years. So I think the decade-by-decade comparison is valid. Notice anything unusual? Of course you do. The current decade has shown us the worst payroll growth in the US in a half century. That’s why I have the feeling this labor market downturn will be the most painful and affect consumers in a very negative manner, occurring at the exact time the consumer opium of choice, credit, is also in quite short supply. Let’s face it, the current decade never experienced a job recovery of a magnitude we have come to know and love. But I have the feeling the payroll downturn will clearly be of a magnitude and duration which we have seen many a time in prior cycles.
So there you have it. Heading into the holidays, we’re looking at a still very weak labor market whose key leading indicators are not showing us any sign of a let up in deceleration as of yet. Happy holidays? Depends whether you are caught up in the Challenger layoff numbers, doesn’t it? In the Merle Haggard tune that is the title of this discussion, the lyric goes, “if we make through December, everything’s gonna be alright I know”. Sorry to be so downbeat, but I’m not sure at this point which December will be followed by better times for the job market, 2008 or 2009.
One last personal note. As we head into the holidays, first, my very best regards and best wishes to you and your families. But also please remember those less fortunate than yourself. That number is surely growing. As Merle’s living country legend counterpart Willie Nelson once quipped when asked why he had given so much of his own personal money away to friends in need over the years, “money is a whole lot like manure, it just ain’t no good unless you spread it around.” Willie, you’re right on the money, brother.
© 2008 Brian Pretti