Chart of the Week: The US Payroll Growth Cycle

For the fifth straight month, payrolls were up in February, right in line with past labor market cycles. During the downturn, payroll losses were record-busting and sparked much discussion about the “new normal” of a sub-par US economy. But at least when it comes to payroll growth, the old normal is back.

Past payroll cycles usually lasted about two years and formed a lower-case “v” shape over time. During the prior nine cycles since 1950, payroll growth (the red line in the chart) typically drifted down below the long-term average (the dashed line) but remained positive, albeit with a considerably degree of variation across cycles (as shown in the red shading). Then the dispersion in the cycles began to disappear as job losses turned decidedly negative: The average monthly loss was -402,000, ranging from a minimum of -306,000 in the 1990-91 recession to a then-record maximum of -602,000 in 1973-75. After the trough, recovery was typically a mirror image of the decline: average payroll growth turned positive six months later and approached the long-term trend six months after that.

The current cycle (the blue line) was an upper-case “V” that busted all of the records: the loss of jobs lasted longer, the maximum job losses of -820,000 was deeper, and the return to positive job growth took correspondingly longer. Aside from the kink in the data from the hiring and firing at the Census Department, positive job growth began to take hold in late 2010 and has been in line with prior cycles ever since.

Total job losses during the downturn amounted to 8.2 million. Then there are the jobs that were never created in the first place because the recession was so long. As a ballpark estimate, the long-term average of 119,000 monthly payroll growth multiplied by the two-year employment down-turn adds up to 2.8 million jobs that might otherwise have been created if there had been no recession. With actual job losses representing three fourths of that total, arguably a fourth of the overhang in the labor market comes from jobs that were never created in the first place. While payroll growth has returned to the long-term average, a sustained period of above-trend growth is needed to bring the unemployment rate down.

The secular forces in the labor market mean that some jobs might never come back, particularly in construction and manufacturing, which could eventually leave the unemployment rate higher than in recent cycles. In the meantime, job growth for other sectors in the economy has already returned to normal. Early indicators, including the ISM and the stock market, are pointing to stronger growth that will continue to push unemployment down in coming quarters.



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