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February 19, 2010

Watching for Job Rebounds

According to economists’ reckoning, the recession very likely ended this past summer, meaning that the U.S.’s national output has begun to grow once again (from a deep trough). But for many households, the direction of recovery has much more to do with job growth, job opportunities, and hours worked. And so, the job watch is on. We continued to lose jobs during 2009, but employment is expected to begin to grow again by mid-year 2010. At some point soon, businesses will no longer be able to expand their production of goods and services without hiring. In anticipation, analysts and some households alike are watching current indicators of labor market activity, such as monthly payroll job counts, along with early or leading indicators of labor market turnaround that might foreshadow rising job opportunities.

There are several such indicators available to states and regions. As a measure of current net job growth, the Bureau of Labor Statistics (BLS) releases state estimates with a three-week lag from the previous month, and metropolitan area estimates with a four- to five-week lag. Recent total nonfarm payroll job trends (below) show that job growth in the U.S. has generally been stronger than in the Midwest (and declines have been more severe).



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Estimates of total payroll employment are derived from a sample of business establishments that report on employees, hours, and earnings of their workers. The estimates are revised one month following their initial release to include information from late-reporting firms. Since the estimates are based on just a sample of firms, they are also benchmarked (once per year) to a near-universe of business establishments. For example, BLS reports that “the average absolute benchmark revision at the state total nonfarm (jobs) level was four-tenths of a percent (0.4%) in March 2008. The range of percentage revisions across states were –2.8 percent to 1.5 percent.”

Given such imperfections in accuracy and timing, alternative indicators are eagerly watched, especially if they have exhibited some previous power in “leading” or predicting past job market turnarounds.

Among the most timely current indicators is “initial claims for unemployment insurance”. After a one-week “waiting period,” newly terminated workers may file for umemployment insurance (UI). These claims are compiled weekly at the state level and reported in a news release by the U.S. Department of Labor. UI claims are an incomplete picture of the job market in several ways. For one, not all workers are covered by, or eligible for, UI insurance. But most importantly, from a conceptual standpoint, UI claims reflect only “job destruction” and not “job creation.” Newly hired workers are not counted in this administrative-type data.

For the U.S. overall, UI claims have generally been falling. Initial UI claims peaked above a weekly average of 650,000 (seasonally adjusted) for March of 2009. By January of 2010, UI claims had fallen to 467,000. Still, these numbers remain higher than in the recent past. For all of 2007, UI claims averaged 322,000 per month.

The charts below illustrate the recent labor market improvement, as measured by initial UI claims, for the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin.[1]
The lines show the time path of UI claims filed for each of the years 2007–09 and January of this year.

State experiences have varied somewhat, though with a similar general pattern. All states experienced a significant surge in claims during the second half of 2008 (blue line), especially during the fourth quarter. Job destruction worsened into the first half of 2009 (red line). But by the fourth quarter of 2009, UI claims had fallen below those of 2008 in every District state. Nonetheless, for the fourth quarter of 2009 and into the first month of January, UI claims in Iowa, Wisconsin, and Illinois remained well above those experienced during in the same period in 2007.



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Other indicators also help to presage rising job creation. Observations of “help wanted advertising” measure the demand for labor, indicating soon-to-be-filled employment transactions. The Conference Board tracks national and state online job vacancies on a monthly basis. Their recent release reports a third consecutive month of strong national gains in advertised vacancies. The gains were widespread across U.S. regions, including the Midwest. Ohio was among those states recording the strongest January over December gain since the data series began in 2005. Seventh District states Illinois, Michigan, and Wisconsin all recorded monthly gains of 10 percent or more.

Analysts also follow the “contingent worker” or so-called temporary help employment series to foreshadow an eventual upswing in total nonfarm employment. In situations where general business conditions are improving but still somewhat weak, and before employers are willing to commit to permanent hiring, firms may begin to contract for workers from specialized employment services firms. Employment at such firms is sufficiently prevalent in four of our District states so that monthly data are reported by the BLS. As shown below (red line), employment of temporary workers grew in the second half of 2009 in Michigan, Indiana, Illinois, and Wisconsin.[2]



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As another measure of potential labor market tightening, the BLS also reports average weekly hours worked of production and nonsupervisory workers for states and metropolitan areas. During slack production times, firms may choose to ratchet back their employees’ hours rather than to lay them off entirely. If so, once production begins to pick up, and before any new hiring takes place, firms will tend to add back work hours for existing employees. Currently, the BLS reports these data for manufacturing workers only.

As seen in the charts below, average weekly hours worked has begun to rise in the U.S. (blue line) and in each District state (red line) except Illinois. Though the manufacturing sector has experienced sharp declines over the past two years, it has begun to recover early in the aftermath of the 2008–09 recession.



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Local chapters of the Institute of Supply Management (ISM) also track manufacturing employment through their monthly survey of purchasing managers. ISM Indices are directional only (they do not measure levels), indicating expansion versus contraction of various categories of business activity at their establishments. A reading of 50.0 indicates that, during the previous month, activity was equally balanced between expansion and contraction; readings above 50.0 indicate a greater reported tendency of establishments to expand. The Chicago ISM survey reported at the end of January (for December) that its reading on employment “leapt to the highest level in nearly five years.” In contrast, the ISM survey for Southeast Michigan reported “declines for the third straight month, continuing its downward spiral to (a reading of 36.0).

What to make of these many indicators? An understanding of the wide array of labor market indicators can provide both workers and the unemployed with a better “read” on when labor market opportunities are arising or when they will improve in their region. In contrast, the most followed labor market indicator, local unemployment rates, can be misleading. As more jobs open up, some workers who have been waiting on the sidelines (and not hunting for jobs) will actively seek employment once again. Once they are actively looking, the survey from which the unemployment rate is calculated begins to count them as “unemployed,” thereby raising the unemployment rate even as net job growth is taking place.

And so, in the coming months, the unemployment rate in both District states and the U.S. may continue to climb, even as the labor market situation may be improving in some locales and industry sectors.[3]

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[1] It is also possible to gather UI claims at the local level of geography. For example, initial claims for metropolitan areas are gathered and reported in Ohio. (Return to text)

[2] These data are also reported for metropolitan areas. These data are also subject to annual revision in March of every year. The data are benchmarked to March of the previous year and projected forward from that benchmark. Hence, the data are re-benchmarked once again the following year, once another benchmark is established (Return to text)

[3] Both the Bureau of Labor Statistics and state and local government agencies provide additional indicators for specific occupations, industry sectors, and local areas. (Return to text)


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Posted by Testa at 11:13 AM | Comments (0)

February 1, 2010

Groundhog Day for Chicago's Economy?

Has the Chicago area lost its mojo? Given the poor economic conditions pervading so many regions of the United States, Chicagoans are not alone in asking whether their path of growth and development has gone off track. When the nation’s economy as a whole is down, it is especially difficult for individual regions to interpret economic signals concerning their long-term performance, but the tendency is to read them negatively. For Chicagoans, recent anecdotal evidence may also have shaded their views about the future of the wider Chicagoland area. For instance, Chicago lost its confident bid for the Olympic games this past fall in the first round; Oprah Winfrey announced the relocation of her iconic show to another locale—and, incidentally, from broadcast syndication to her own cable network; several large trade shows announced new venues or possible moves away from Chicago; and the planned mixed-use residential tower—The Spire—halted construction. Such events hardly settle the case; many positive developments mark Chicago’s past decade. In particular, Chicago’s two prominent financial exchanges—the Chicago Mercantile Exchange and the Chicago Board of Trade—moved successfully into the era of electronic trading; and they then merged into the world’s largest (CME Group), expanding even further by recently acquiring the New York Mercantile Exchange (NYMEX). The city’s Millennium Park opened to worldwide acclaim; Trump Tower was completed; and the famed Art Institute opened its Modern Wing—the largest expansion in the museum's history. Additionally, Chicago’s design and architectural talent played an integral part in the completion of the world’s tallest building in Dubai.

Even with such accomplishments, Chicagoans have a more fundamental reason to pause when assessing their economic direction and performance. Following some very painful years of restructuring that took place during the 1970s and 1980s, the Chicago area economy and its central city experienced a surprising revival from the late 1980s through the 1990s. The revival led many local leaders to believe that the region had begun a new improved course of growth and development. The charts below first show the metropolitan area’s unemployment rates since 1980. Following the 1981–82 national recession, when the local unemployment rate had soared to above 11 percent , the unemployment rate began to fall steeply; it rose again during the 1990–91 recession, but it then continued to fall to just above 4 percent by the year 2000. By comparing the Chicago area’s unemployment rate with the nation, we can see that Chicago’s labor market tightness exceeded the nation’s during the mid to late 1990s, before rising above the nation’s once again over the recent decade to date. Was Chicago’s strong economic performance during the 1990s an aberration?



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Chicago’s turnaround following the 1980s was remarkable in that a fundamental restructuring supported it. Specifically, though the metropolitan area shed much of its manufacturing base, its work force shifted increasingly into professional and business services. In response, many Chicagoans crafted a new image of their metropolitan region: Instead of being a “hog butcher for the world” and the regional locus for manufacturing and transportation, Chicago (at least in the mind of its citizens) was moving into a new role as a global city, one whose economic connections were being forged with other world business capitals. Chicago was seen as a city casting off its roots for something better.

During this time, a central city revival contributed greatly to the wider metro economy. For example, Chicago became a magnet for young educated workers who occupied jobs in the rapidly growing business and professional services sectors. The central city’s quality of life and amenities reputedly brought in “knowledge workers,” in turn attracting companies or those parts of companies that desired access to the young, highly skilled labor pool. The number of central area jobs in professional and business and financial services grew robustly; and the city’s unemployment rate improved, gaining ground on that of its suburbs from the early 1990s onward. The central city gained population during the 1990s for the first time (counting the decade’s total) since the 1940s, although immigration of lower-skilled workers from Central America accounted for a majority of the gains.

Chicago’s performance in the current decade looks much less sanguine. As seen in the charts above, the metro area’s unemployment rate rose rapidly during both recessions of the 2000-09 decade, lingering above the national average for much of the first several years. Shortly after the 2001 recession, a gap of one-half percentage points or more opened up to Chicago’s disadvantage, and it did not dissipate until 2006. And over the past year or more, the Chicago unemployment rate has once again been running 0.5 percentage points or more above the nation’s.

Were some especially negative but transitory factors at play earlier in the 2000s' decade that would suggest that the outlook for the coming years should be revised upward? Yes, to some degree. Chicago’s sizable manufacturing sector declined disproportionately compared with that of the nation in the early part of the recent decade. In part, the Chicago area’s manufacturing base was steeped in telecommunications equipment, which was especially hard hit nationally. Although the current national downturn in manufacturing is also very steep, Chicago’s manufacturing job base is weathering the recession modestly better than the nation’s.

The post-9/11 fallout in travel and tourism also left Chicago vulnerable earlier in the decade. And while the current economic environment has also been very challenging for the travel-related segments, these segments have fared better than earlier in the decade.

Chicago’s lagging post-recessionary recovery earlier in the decade can also be traced to its hefty professional and business services sectors. After 2001, Chicago’s payroll job growth in these sectors lagged the end of the U.S. recession by two full years. Many of these industries behave like investment or capital goods (e.g., real objects owned by individuals, organizations, or governments to be used in expanding production and sales of other goods or services). That is, during post-recessionary periods companies do not begin to expand their purchases of capital goods until their existing capacity begins to strain and the prospects for market expansion become buoyant. Looking forward, this means that these important business sectors for Chicago may once again experience a sustained period of growth. But the current economic signal is unclear as to whether the Chicago area economy is in a lull, or whether its long-term growth prospects have dampened.

Hindsight does give us some perspective as to the degree to which the Chicago metro area economy has truly divorced itself from its regional business roots to connect with a newly emerging structure in global markets. One chart below shows a ratio of broad economic activity—namely, per capita income—for the Chicago region to that of all other metropolitan areas over the past four decades; the other chart shows the ratio of per capita income of the Chicago area to that of the industrial Midwest states of Illinois, Indiana, Wisconsin, Michigan, and Indiana. First, in comparing Chicago’s per capita income to that of all other U.S. metropolitan regions, Chicago’s relative income is seen to fall modestly in the 1970s and then steeply over the first half of the 1980s. But then, from the mid-1980s throughout the 1990s, per capita income gained steadily on the U.S. average; by this metric, Chicagoans were correct about their economy’s performance: It had truly been on the rise over that period.



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However, it is more difficult to draw the conclusion that the Chicago area had successfully restructured its jobs base away from its surrounding region to become a global city. Whether Chicago had become more of an interconnected global financial and business center, such as New York or London, is still an open question. As seen above, for much of the 1990s, the Chicago region’s per capita income made little if any gains on the Great Lakes region. Rather, by way of explanation, the surrounding Midwest region was also experiencing a comeback of the same degree [1]. Domestic automakers were well on their way to profitability in producing energy-hungry passenger vans and sport utility vehicles. Meanwhile, rapid growth in the developing world supported Midwest production of capital goods machinery, such as farm and construction equipment. The Chicago regional economy continued to restructure toward high-skilled service provision, but its linkages may have remained somewhat parochial. That is, the Chicago area’s own growth appears to have been achieved through the provision of professional and transportation services to its traditional Midwest business partners.

In reappraising the era of the 1990s (especially in light of the Chicago region’s recent subpar economic performance), Chicago leaders and analysts may be motivated to look more carefully at possible directions for the future. Relative to some other Midwest and Northeast cities, the Chicago area has many assets, such as its prodigious base of professional services and a vibrant central city, which may provide ample opportunities for growth. Yet the future of Chicago’s economic direction and structure remain somewhat murky.

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[1]In the current decade, Chicago’s gain on the surrounding region largely reflects rapidly falling incomes and economic activity in Michigan. (Return to text)


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Posted by Testa at 8:41 AM | Comments (5)