by Calculated Risk on 7/12/2008 08:00:00 AM

Note: I'm hiking in the Sierras, but I thought I'd leave some thoughts on employment. I'll be back Saturday night or Sunday morning.

I'm pessimistic on employment - I think problems in the labor market will linger - but I do not think unemployment will rise to 8% (a severe recession) during this economic downturn.

Note: just because unemployment doesn't rise to 8% doesn't mean many more people aren't hurting. Many people will probably be underemployed, and real wages (purchasing power) will decline for many employed Americans.

There are several reasons for my optimism (if you can call it that!). One of the reasons is the makeup of U.S. employment.

Click on graph for larger image in new window.

The first graph shows the year-over-year change in employment for manufacturing, construction, and everything else. Manufacturing and construction employment are more susceptible to large swings year-over-year, as these areas typically experience booms and busts.

It is reasonable to expect that construction employment will continue to decline significantly - perhaps another 1 million construction workers will lose their jobs as Commercial Real Estate (CRE) construction declines later this year and into 2009.

However manufacturing employment will probably only decline slowly for two reasons: 1) the weak dollar is helping with exports, and 2) manufacturing employment never recovered from the bust of a few years ago. So the decline in manufacturing employment will probably not be severe.

And these two volatile areas of employment make up much less of the total U.S. employment than during earlier recessions.

The second graph shows the percent of total U.S. non-farm workers employed in manufacturing and construction. Manufacturing employment has been declining steadily - and will probably continue to decline as a percent of total employment. The same percentage swing in manufacturing employment now will have a much smaller impact on total employment than during previous recessions.

Construction employment will probably decline sharply, but this only accounts for just over 5% of total employment.

The next most volatile area is retail sales employment, and the current downturn will probably see a significant decline in retail employment. And many service employees will be underemployed - and that is painful too.

But over all, total employment probably won't decline enough to cause unemployment to rise to 8%.