Good news about the US labor market

Despite recent job cuts, employment trends suggest a mild recession.

As fears of a recession grow wider and more severe, with some going as far as to suggest that the United States is facing its worst financial crisis since the Great Depression, it is important to take a step back and put things in perspective or else risk overreaction on the part of consumers, businesses, and financial institutions.

Primarily, we should look more closely at what the labor market is telling us about the fundamental strength of America's economy, even in the face of severe headwinds blowing from Wall Street and the housing sector. The US economy's ability to weather storms is the hallmark of its power and this ability stems directly from the fact that it can keep large portions of the population employed.

It may be difficult for most observers to be optimistic after last Friday's jobs report, which detailed a 0.3 percentage point jump in the unemployment rate to 5.1 percent and the loss of 80,000 jobs. Indeed, the third straight monthly decline in US payrolls could be the strongest indicator yet that the nation is in a recession.

If we are following the pattern of the 2001 recession, the recent job losses are an ominous sign. At the onset of the last recession in March 2001, job losses began mounting immediately, eventually reaching 2.7 million before payrolls began growing with consistency in September 2003.

However, if we are following that pattern, then there is reason to believe that this will be a mild recession. After three months of negative job growth, the economy has seen a net loss of 232,000 jobs, far fewer than the 355,000 lost between March 2001 and May 2001, the first three months of the last recession, which was considered mild by historical standards. Even at its worst point, that recession saw unemployment peak at 6.3 percent, still relatively low compared with previous recessions.

Companies could be particularly well-positioned during this slowdown to preserve high employment levels. The reason? This period of growth didn't include the kind of hiring bubble that's beset previous booms. In the four years leading up to the 2001 recession, US payrolls grew by an average of 239,000 jobs each month, as the excesses of the dotcom boom led to extensive hiring across all industries. With a few notable exceptions in the financial sector, it appears that employers learned their lesson from that period and resisted the urge to hire "any warm body," even when the housing market seemed unsinkable. In the four years preceding this slowdown, monthly job gains averaged 163,000.

The result of this more conservative approach to hiring can be seen in the fact that we have yet to see a surge in job-cut announcements equaling 2001 levels. Outside of the financial industry, job cuts have been relatively stable, broad, and shallow. Challenger, Gray & Christmas's tracking of job-cut announcements in recent months shows far fewer losses than what we recorded during the onset of the last recession.

Another factor that could make the economy better able to withstand this downturn is that the government, including the Federal Reserve, has become much more adept at combating recessions. Each of the past three recessions has been successively weaker and shorter as policy missteps have lessened.

This time around, the government is taking concerted action on both a monetary and a fiscal basis to solve the crisis. The coordination between the Fed, the Treasury Department, the White House, and Congress has been a sight to behold. So has the collaboration between the Democrats and the Republicans.

It is no fait accompli that the US or world economy is going into recession. Governments are working together in earnest to avert it, and the policy tools and wisdom at their disposal are better than ever. Policymakers are taking the right steps to promote a speedy recovery. It is easy to be disheartened by the negative flow of news, but the strength of the US labor market should bolster the confidence of our outlook.

John A. Challenger is CEO of Challenger, Gray & Christmas, Inc., the global outplacement consultancy.

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