Civilian Unemployment Rate: 7.2% in December vs. 6.8% in November, cycle low is 4.4% in March 2007.

Payroll Employment: -524,000 in December vs. -584,000 in November, net loss of 154,000 jobs after revisions of payroll estimates for October and November.

Hourly earnings: +5 cents to $18.36, 3.7% yoy change vs. 3.8% yoy change in November; cycle high is 4.28% yoy change in Dec. 2006.

Household Survey – The unemployment rate in December was 7.2%, up from 4.9% in December 2007. The unemployment rate of December 2008 per se is the highest since January 1993. U-6, a broader measure of unemployment which includes those who are working part-time but would prefer full-time employment and those who are available for work but are not working or looking for a job, was 13.5% in December, the highest since record keeping began for this series in 1994 (see chart 1). The unemployment rate has recorded gains equal to or in excess of 0.3 percentage points during five months of 2008. Historically, of the 11 recessions since 1948 including the current downswing, five recessions have recorded large monthly gains (+0.3 percentage points and greater) of the unemployment rate during a string of five months or more.

From an historical perspective, the increase in the unemployment rate in the current recession is moving close to the median gain (3.2 percentage points) in the unemployment rate from a cycle low to a cycle peak during recessions (see table 1).

Establishment Survey – Payroll employment fell 524,000 in December, after revised losses of 423,000 and 584,000 jobs in October and November, respectively. There were 154,000 more jobs lost after revisions of the earlier estimates of October and November of payroll employment. Payroll employment has shrunk by of 2.6 million since December 2007.

Widespread job losses were reported in December, with factory (-149,000) and construction (-101,000) jobs recording the largest reductions. A total of 791,000 factory jobs have been lost in 2008, with 50% of them occurring in the fourth quarter. Payrolls in the auto industry were reduced by 21,400 in December and 161,500 in all of 2008. Retail employment fell 67,000 in December, while health care jobs rose 32,000 and government employment moved up 7,000. The diffusion index indicates that in December the fewest number of industries reported an increase in employment since 1991 (see chart 3).

Hourly earnings rose 3.7% on a year-to-year basis in December, down from a 3.89% increase reported for November. The weakness in payroll employment suggests that the wage and salary component of personal income most likely fell in December. The sharp 2.4% drop in the factory man-hours index points to a significantly weak December tally for industrial production. The workweek was shorter in December (33.3 hours) compared with November. This, combined with a drop in payrolls, resulted in a 7.7% drop in the total man-hours index in the fourth quarter, which points to significantly weak GDP report for the quarter.

Many questions are raised by the staggering headline numbers of the employment report. Also, while it is true that the size of job losses in 2008 is the largest since 1945, we need to take into consideration the size of the labor force. Stepping back and looking at historical comparisons, as shown in chart 5, puts the subject in a better perspective. [Note: Chart 5 is an index chart where the level of employment in the quarter corresponding to the peak of the business cycle is set to 100 and appropriate computations are made for levels of employment before and after the peak of the business cycle. For example, an index reading of 98 indicates that the level of employment in the relevant quarter was 2.0% below that of the level of employment during the peak quarter of business cycle. Likewise, a reading of 102 indicates that the level of employment in the relevant quarter was 2% higher than the number employed in the quarter identified as the peak of the business cycle.] The extent of the decline in payroll employment after four quarters of the peak in economic activity in the current downturn (index number is 98.55) is close to the extent of job losses seen in 2001 (98.47) but the situation in the 1991-92 (98.8) recession was marginally better, while the 1981-82 (97.6) recession was weaker. The average employment index for the period 1960-1980 (not shown in chart) posted a more muted drop to 99.6 one year after the peak of a business cycle. Of course, the future trend of employment conditions will determine the relative standing of employment in the current downturn.

Conclusion – The Fed is expected to stay on hold for all of 2009 in terms of implementing monetary policy changes via adjustments of the target federal funds rate but other non-interest avenues to support/ease financial market conditions remain open. The details of the employment report are grim and provide ample evidence for proponents of a large fiscal stimulus package to revive economic activity.

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