Over at the Inner Workings blog I analyze employment vs. inventory trends, taking off from an analysis by Joe Lavorgna, the chief economist at Deutsche Bank in New York. As we debated last week on Larry Kudlow’s TV show, Joe believes that inventory rebuilding will be associated with employment recovery. My analysis shows that the apparent correlation between inventory change and payrolls change is deceptive. It is very strong on the way down (when big companies liquidate both jobs and inventories) but very weak on the way up (when new jobs are created by small start-ups to replace permanent job losses from large companies).

The miserable state of small business in the US, I believe, rules out strong employment recovery.