Employment Growth Merits Closer Look

Despite the one-two punch of a for-sale housing market implosion now in its third year—and a financial market meltdown that began in summer 2007—the U.S. economy has thus far managed to sidestep a serious recession. A major downturn could still occur, but even if it doesn’t, there is still much

Despite the one-two punch of a for-sale housing market implosion now in its third year—and a financial market meltdown that began in summer 2007—the U.S. economy has thus far managed to sidestep a serious recession. A major downturn could still occur, but even if it doesn’t, there is still much to be concerned about for the apartment industry. In particular, judging by what happened in the last two economic cycles, a strong and rapid recovery in the job market is unlikely. Since apartment professionals care (or ought to care) more about employment growth than overall economic growth, the job market merits a closer look. Economic Growth and EmploymentGenerally speaking, economic growth is positively correlated with employment. The correlation is less than perfect, however. There used to be a clear macroeconomic pattern. Although employment lagged behind the overall economy throughout the cycle, the downturns in economic growth and employment growth showed similar magnitude and duration.But no longer. Recessions have become less frequent, shorter and shallower, but job market downturns have become longer.Both of the last two recessions (which began in July 1990 and March 2001, respectively) lasted only eight months. This is noticeably shorter than the 11-month average for postwar recessions prior to 1990. Likewise, the decline in Gross Domestic Product (GDP) was smaller in the last two recessions, declining by 2.0 percent on average since 1990, but 2.9 percent before 1990. There seem to be two main reasons for this dampened economic cycle. First, businesses maintain better inventory control. Since the buildup of unwanted inventories produced an even larger—and longer—cutback in production when demand fell, this improved inventory control has moderated the ups and downs in economic activity. (A related factor has been the shift toward a service-based economy, since service activities like retail work don’t have the same inventory problem associated with the production of goods.)Second, monetary policy—the control of the money supply and interest rates by the Federal Reserve—has been better informed and better targeted in dealing with the traditional economic swings.In the most recent downturn, the recession lasted just eight months, but employment fell for 30 months. That was more than twice as long as in any previous decline and almost four times as long as the recession itself. It took another 18 months to reach the prior employment peak. It took four years for employment to regain its pre-recession level.To put this in perspective, by the time the economy began to recover in November 2001, 1.6 million jobs had been lost. After the recovery began, another 1.1 million jobs were lost in the subsequent 21 months. This disconnect between economic growth and the job market was unprecedented.The pattern was similar during the recovery from the recession of 1990-1991. Although total employment fell for 11 months (not much different from the 8 months of decline in the overall economy), it took another 21 months before jobs had rebounded to their previous peak—hence, the “jobless recovery.” Duration and Severity of Job LossThis suggests another useful metric: the number of months between the job market peak to its subsequent recovery to that level. In the job cycles prior to 1990, this averaged 21 months. In the last two cycles, however, it averaged 40 months, despite the fact that economic cycles were among the shortest and shallowest of the last six decades. While the disconnect in duration between the downturns in the overall economy and slumps in employment is the clearest difference in recent decades, there is also a significant difference in severity, albeit in the opposite direction. Job losses are continuing well past economic recoveries, but the severity of labor market declines has diminished over time. The average total decline in jobs in pre-1990 downturns was 3.0 percent, but just 1.8 percent in the last two. Fewer jobs were lost, on average, in recessions prior to 1990 than has been the case since. In addition, the job market rebounded more quickly pre-1990. The trends are clear, but the reasons for this change are not. While some of the reduced severity of employment declines (the share of jobs lost from labor market peak to trough) can be explained by the reduced severity of economic downturns, this just makes the increased duration of labor market weakness more of a puzzle. Increased globalization and changing workforce strategies may be important. Alternatively, it may be that in weak labor markets, firms are able to rationalize operations and increase labor productivity in ways that they are unable to do when demand for labor is stronger.Apartment Industry ImplicationsWhile no sustained job market decline has ever occurred absent a recession (indeed, a sustained job market decline is one of the deciding factors in identifying a recession), recent experience has shown that very weak labor markets can occur even when GDP doesn’t fall much. For that reason, the fact that GDP growth has not slipped into negative territory should be of little comfort to the apartment sector, considering that employment has fallen for eight straight months (nine months for the private sector). Right now, there is no more important economic indicator for the apartment industry than the job market—not even the turmoil in the credit markets.Nonetheless, the industry is the beneficiary of two trends that should mitigate the effect of a downturn. These trends are the reduced outflow of renters buying houses and, secondly, demographics. The first trend may only last until house prices start to appreciate again—although that could still be a few years away—but the second will be of longer duration. So, while the short run will likely be challenging, the outlook over the intermediate term looks bright. Mark Obrinsky is chief economist and vice president of research for the National Multi Housing Council in Washington, D.C.