Recovery looking like an 'L' without any growth in jobs

The big question is how close it is to being over. The answer seems to be: quite a long way, in both the U.S. and Europe. Banks still aren't lending, and credit is hard to get. Deflation remains a major concern in many countries.

Central bankers' great worry is that they have no idea what to do about hyper-deflation. They are trying to create some inflation because they know what to do about that. We now seem to have entered what John Maynard Keynes called “the long dragging conditions of semi-slump,” following the acute phase of the cycle, which we experienced over the last year or so.

The biggest policy error that could be made now would be to remove stimulus too early. That could result in a W-shaped or even L-shaped recovery, given that the private sector seems to be on its back. The experience of what happened in the U.S. in 1937, when the recession was assumed to be over and monetary policy was tightened too soon causing the economy to slump again, should be instructive.

The effects of the financial crisis were first evident in the U.S. housing market: Home prices started falling toward the end of 2006. Unemployment began to rise from mid-2007 and then employment declined from December 2007, which the National Bureau of Economic Research dating committee placed as the start of the recession. Output didn't drop until the second quarter of 2008.

This was also the starting date of the recession in the UK and the European Union, whether one uses unemployment or output. The financial pandemic had spread across the Atlantic.

The evidence then is that, if anything the labor market has been a leading, rather than a lagging, indicator on the way into this recession. On the way up, I am also looking for some early signs of recovery in the U.S. labor market, but to this point there are few.

In a recovery driven by a growth in house building, for example, you should see an increase in construction employment. I am looking for gains in employment to start emerging in at least a few industries.

In the U.S. last week, the Bureau of Labor Statistics published the latest labor-market data, which showed that unemployment had climbed to 10.2 percent in October from 9.8 percent in September and 6.6 percent a year earlier. Some commentators took comfort from the slowing in the decline in non-farm payrolls, which fell 190,000 on the month.

These data are derived from establishment surveys, but according to the alternative estimate of employment based on household data, the decline was much bigger. Employment on this basis fell by 590,000 on the month and by almost 1.4 million during the last three months. Over the last 12 months, employment has declined by 5.5 million on the establishment count and 6.4 million using household data.

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