The dour consumer sentiment readings said that the great unwashed are smarter than the financial talking heads. They had ceased to be impressed with the “green shoots” theory. Lo and behold, worse than expected employment data has proven them right.
We’ve pointed out that the Carmen Reinhart/Kenneth Rogoff analysis of past severe financial crises suggests that our unemployment rate will peak at over 11%. Given the quality of our policy responses, I see no reason to expect us to do better than the norm. But 11% plus does not seem to (yet) be in anyone’s spreadsheet.
David Rosenberg, who has been of the downbeat school of thought throughout the crisis and therefore has had a good series of calls, weighted in before the unemployment figures were released with a pessimistic take on the job market (note that a bold call of his last year was saying the Fed would be at 1% by end of the year for 2008 when everyone else was obsessed with inflation. Of course, they were even lower than that, but the point is 1% looked like a wildly bearish forecast). Rosenberg earlier this week stressed that even when a recovery starts, job growth will be non-existent due to the way hours have been cut.
From Gluskin Sheff (no online version):
A survey conducted by YouGov for the Economist magazine found that 5% of respondents had taken a furlough this year and 15% had accepted a pay cut (see The Recession and Pay: The Quiet Americans on page 33 of this week’s edition).
As wages deflate, workers are looking for ways to supplement their shrinking income base, for example, by moonlighting. Indeed, a poll undertaken by CareerBuilder.com and cited in the USA Today found that one in every ten Americans took on an extra job over the last year; another one in five said they intend to do so in the coming year. These numbers are double for the 45 to 54 year olds who now see early retirement, once around the corner, as an elusive concept.
Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the deflationary aftershocks that follow a post-bubble credit collapse typically last for 5 to 10 years. Businesses understand better than the typical Wall Street or Bay Street economist and strategist that everything from order books, to output, to staffing have to now be restructured to adequately reflect a permanently lower level of leverage in the economy.
Indeed, by our estimates, there is up to another $5 trillion of household debt that has to be eliminated in coming years and that process is going to require that consumers go on a semi-permanent spending diet. Companies see this, which is why they are not just downsizing their payroll, but have also cut the workweek to a record low of 33.1 hours. Fewer people are working and those that are still working have seen their hours dramatically cut this cycle….
The op-ed column by Bob Herbert in the Saturday New York Times really hit the nail on the head on this whole ‘green shoot’ issue — how can there be ‘green shoots’ when the labour market is deteriorating at such a rapid clip fully nine months after the Lehman collapse. The full brunt of the credit collapse may be behind us, but please, the other two shocks, namely deflating labour markets and deflating home prices, are very much still front and centre. For every job opening in the USA, there are more than five unemployed actively seeking work vying for those jobs. That is unprecedented and nearly double what we saw at the depths of the 2001 recession. The official ranks of the unemployed have doubled during this recession to 14 million and if you take into account all forms of labour market slack, the unofficial number is bordering on 30 million, another record. For those who still believe that we somehow managed to avoid an economic depression this cycle because of a 13% fiscal deficit/GDP and a pregnant Fed balance sheet, the Center for Labour Market Studies at Northeastern University estimates that the real unemployment now stands at 18.2%, which is actually higher than the posted rate at the end of the 1930s….
When the recovery does come, the record number of people that have been pushed into part-time work are going to see their hours go back up, which will be good for them, but not so good for the 100,000 – 150,000 folks that will be entering the labour force looking for work with futility. The unemployment rate is probably going to rise through 2010, which is going to pose a challenge for incumbents seeking re-election in the mid-term voting season. It may also prove to be a challenge for Ben Bernanke’s re-appointment chances this coming February.
As we said above, companies have permanently reduced the size of their operations with the knowledge of how much credit is going to be available to them in the future to survive because the financial sector is going to be operating under more supervision and regulation and leverage ratios, which means the funds available to support a given level of GDP is going to be measurably smaller than what we had become accustomed to during the secular credit expansion, which really began in the mid-1980s, only to turn parabolic during the ‘ownership society’ era of 2002 to 2007.
What makes this cycle “different” is that three-quarters of the workers that were fired over the last year were let go on a permanent, not a temporary basis. A record 53% of the unemployed today are workers who were displaced permanently — not just temporarily because of the vagaries of the traditional business cycle. This means that these jobs are not going to be coming back that quickly, if at all, when the economy does in fact begin to make the transition to the next expansion phase. In turn, this implies that any expansion phase is going to be extremely fragile and susceptible to periodic setbacks. There may well be job growth in the future in health care, infrastructure, energy technology and the like, but we can say with a reasonable amount of certainty that there are a whole lot of jobs in a whole lot sectors where jobs lost this recession are not going to come back. For example, the 580k jobs lost in financial services; the 320k jobs lost in residential construction; the 1.7 million jobs lost in durable goods manufacturing; the 1.1 million jobs lost in the wholesale/retail sector; and the 380k jobs that were lost in the leisure/hospitality industry. That is over four million jobs that were shed this cycle that are not likely to stage a comeback even after the recession is over. To show you how big a number four million is, we didn’t create that many jobs in the prior expansion until it reached its fourth birthday towards the tail end of 2005.
Compared to that, Mohammed El-Erian of Pimco sounds almost cheerful, but he too thinks the labor market data is worse than the headlines suggest, and echoes many of Rosenberg’s themes. From the Financial Times:
What if the US unemployment rate rises above 10 per cent and stays there for an extended period?…
The unemployment rate is traditionally characterised as a lagging indicator…This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks.
Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system.
In just 16 months, the US unemployment rate has doubled from 4.8 per cent to 9.5 per cent, a remarkable surge by virtually any modern-day metric. It is also likely that the 9.5 per cent rate understates the extent to which labour market conditions are deteriorating. Just witness the increasing number of companies asking employees to take unpaid leave. Meanwhile, after several years of decline, the labour participation rate has started to edge higher as people postpone their retirements and as challenging family finances force second earners to enter the job market.
Notwithstanding its recent surge, the unemployment rate is likely to rise even further, reaching 10 per cent by the end of this year and potentially going beyond that. Indeed, the rate may not peak until 2010, in the 10.5-11 per cent range; and it will likely stay there for a while given the lacklustre shift from inventory rebuilding to consumption, investment and exports.
Beyond the public sector hiring spree fuelled by the fiscal stimulus package, the post-bubble US economy faces considerable headwinds to sustainable job creation. It takes time to restructure an economy that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers. This will disrupt consumption already reeling from a large negative wealth shock due to the precipitous decline in house prices. Consumption will be further undermined by uncertainties about wages.
This possibility of a very high and persistent unemployment rate is not, as yet, part of the mainstream deliberations. Instead, the persistent domination of a “mean reversion” mindset leads to excessive optimism regarding how quickly the rate will max out, and how fast it converges back to the 5 per cent level for the Nairu (non-accelerating inflation rate of unemployment).
The US faces a material probability of both a higher Nairu (in the 7 per cent range) and, relative to recent history, a much slower convergence of the actual unemployment rate to this new level. This paradigm shift will complicate an already complex challenge facing policymakers. They will have to recalibrate fiscal and monetary stimulus to recognise the fact that “temporary and targeted” stimulus will be less potent than anticipated. But the inclination to increase the dose of stimulus will be tempered by the fact that, as the fiscal picture deteriorates rapidly, the economy is less able to rely on future growth to counter the risk of a debt trap.
Politics will add to the policy complications. The combination of stubbornly high unemployment and growing government debt will not play well. The rest of the world should also worry. Persistently high unemployment fuels protectionist tendencies. Think of this as yet another illustration of the fact that the US economy is on a bumpy journey to a new normal. The longer this reality is denied, the greater will be the cost to society of restoring economic stability.
"Recovery" is yet another Orwellan term which fraudulently elides the class struggle and suppresses the question cui bono, who benefits?, which is the first question anyone should ask about anything in economics or politics as a whole. Nowadays it would be hard to find an exception to the rule that the rich overwhelmingly benefit, everybody else not at all, and indeed everyone else ends up worse off, more dispossessed.
In this case, who "recovers"?
How can you possibly have a "recovery" with such high unemployment? For anyone who uses the English language and not some Orwellian simulacrum of it (e.g. economist-speak), this is impossible by definition.
Who benefits? Every policy to deal with the crisis, all the bailouts, have been nothing more than a massive redistribution of wealth from the taxpayers to the finance sector elite.
So the answer to "who recovers?" is, no one. Those already rich get richer; everyone else is now a permanent victim, permanently more poor.
Both these summary analyses are quite lucid, particularly the Gluskin Sheff relation of how causes turn into expected effects. I think we will be lucky to have inflation crest at 'only 11%,' and that's bearing in mind that that number is baldly understated. But despite that, and meaning this as no disrespect to those afflicted with job loss either now or in the next 18 months, the unemployment numbers weren't the worst ones in these reports. The hours worked declining to 33/wk sucks all the money velocity out of the employment we do have. And beyond that, we now have the first real evidence of deflation. Over at Krugman's blog under his 'Smells like deflation' post, he's got a chart showing a precipitous _and increasing decline_ in wages for those working over the last 3 months. Which should be no surprise, one supposes, if indeed 15% of the workforce has taken a paycut even while continuing to work during this year so far.
To this point, there has been much talk about deflation, but without real hard evidence. Yes, we have had huge asset price declines . . . from wildly overvalued levels. If those prices level off back near long term trends rather than undershoot, that is not necessarily deflationary. If the banking system had collapsed, the consequent collapse in the velocity of money and severe rationing of credit would have been patently deflationary. That was prevented (for now) by government intervention. We have credit rationing, but at the same time low rates and the flashfreezing of many high-leverage credit maws have prevented credit rationing at deflationary levels. We have had major unemployment declines, yes. In and of themselves, those are not necessarily deflationary, either, although because they continue we approach unemployment levels where the scale of demand collapse is inherently deflationary. But while deflationary pressures have been evident, actual deflation has been absent.
How would we reliably know that we have actual deflation? If we get y/y wage declines north of 3-4%, say, particularly if they continue to decline. If we have sustained declines in prices for consumer durables running to 5% or beyond, something indicative of real demand collapse, the total absence of consumer credit, or both. If small businesses reporting custom are _closing_ because they are unable to secure working credit on viable terms, indicating severe credit rationing. Note: These three conditions are only some of several, and moreover are benchmarks rather than definitive thresholds: if we see the whites of their eyes, here, we're in trouble. Well, regarding wage declines we can see that particular pale rider in view.
We are entering depressionary territory, is what I'm saying. As of this summer. By mid-Autumn, we'll know for sure. And I sincerely hope that by mid-Winter 2010 most of our present Congress are fired, 90% of whom are doing nothing useful for the country for their salary, along with most all of Prez O's intimate advisors. We can't fire him for another two years, but maybe we can light a fire under him.
One of the interesting aspects for unemployment for me is the different impacts of the different safety nets in different countries. For instance we ought to expect those coming off unemployment benefits to initiate a second wave of reduced demand in the US and I think this is being reflected in the PMI new orders data. We then have certain economies which will weather unemployment better than others perhaps at the expense of fiscal difficulties. We could then see commodity price rises as some economies come out of recession faster than others.
Hours worked declining does suggest that a deflationary environment is continuing, but I find it strange that economists seem unable to accept that there might be elasticity in the price wage relationship. It seems to me market speculation and market dynamics can also have an impact on price along with the state of other global economies. These deviations from the normal relationship can I suspect last longer than many economists suspect.
It comes as no surprise that firms are ahead of the game and are not forecasting a significant up tick in demand. I do wonder if they sometimes have a narrow focus on protecting their own business rather than looking at the overall economy, but I guess that’s not what they are paid to consider. The dynamic of reducing hours to retain skilled workers will eventually work through to unemployment if conditions do not improve further reinforcing the cycle.
@ Richard Kline –
Have a look at Richard Posner's latest book, "A Failure Of Capitalism: The Crisis Of '08 and the Descent Into Depression".
It's interesting for a couple of reasons. 1) Posner makes the case strongly that we are in a depression, rather than a recession. Not like the Great Depression, mind you, but a depression nevertheless, similar to the depressions we experienced on a somewhat regular basis in the 100+ years leading up to the GD and 2) Posner appears to be having a considerable change of heart with regard to his libertarian failure – he makes the case that this crisis is in fact a failure of capitalism and would have happened even in the absence of "government meddling" which is a shocking admission for a libertarian.
That should say "libertarian philosophy" above.
Regarding the unemployment numbers, I think we're going to see a shift in causality very soon if it's not happening already. From a situation where the financial crisis is causing escalating unemployment to one where escalating unemployment starts to worsen the financial crisis.
Despite all of the green shoots nonsense from the CNBC crowd, we are far from out of the woods. What would happen if the stock market took another leg down and then there was another blowup at one of the big banks causing them to have to go to the gov't. for additional capital? What if it were a "bank" like Goldman Sachs, that already made a big show about paying back the TARP and then proceeded to start paying record bonuses for a short period of time again? The popular political pressure to cut the cord and just let them fail would be irresistible.
A few posts on UE that folks might find of interest
Perhaps I am prejudiced but the El-Erian piece just seems to me like blather masquerading as prognostication. El-Erian says that unemployment is up and that it is a lagging indicator? Wow, what insight! Moving on from there,
"the post-bubble US economy faces considerable headwinds to sustainable job creation. It takes time to restructure an economy that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers."
Finance, leverage? What about dopey bondholders? Just saying. And "restructured"? Interesting word. I suppose El-Erian would say along the same lines that the Titanic went through a period of restructuring following its encounter with the iceberg. Finally, there is that last sentence. Companies are going belly up because of their bad financing, lack of access to credit, and collapsing markets. "Unproductive" workers have pretty much jack to do with that. But hey, if Pimco wanted to get rid of some of the drones it employs, I couldn't think of a better place to start than Bill Gross and El-Erian.
The Scheff column in contrast uses actual numbers and insights to underlie his points.