This is a post I just wrote over at Yves Smith’s site Naked Capitalism in response to a reader request. Marshall Auerback has already written a reply as well and I will post this later today.

A reader at Naked Capitalism asked us to respond to a recent article from the Christian Science Monitor asking Does US need a second stimulus to create jobs?

Marshall Auerback has already done some heavy lifting. He says emphatically yes. Now I want to take a crack at this. My short answer is no. But before I go into this, as an aside, I wanted to mention Marshall’s new smiling, happy picture up at the great blog New Deal 2.0 where he now writes.  Earlier, when Credit Writedowns was hosted at Blogger, he used a picture best described as a mug shot in his profile, but he has changed that one too (although he smiles there a little less). He thinks we haven’t noticed this sleight of hand.  Well I have! Once upon a time, Marshall wrote with a man I called all bearish, all the time this summer. Take a look at that post; you don’t see him smiling now do you? We have Lynn Parramore, New Deal 2.0’s editor to thank for making Marshall Auerback into an optimist.

Different policy choices

But all teasing aside, I do want to take the opposite side of this trade.  You see I too was a deficit hawk. And while I may have been backing fiscal stimulus, I have felt conflicted for doing so. Here’s how I see it. 

You have four options:

1. No stimulus. Let the chips fall where they may. Yves Smith calls this the ‘Mellonite liquidationist mode.’ The thinking here is that trying to avoid the inevitable bust only makes it that much larger. And the economic policies during recessions in 1991 and 2001 seem to bear that out. The Harding Recession of 1921 is commonly seen as gold standard response.
2. Monetary stimulus only. Quantitative easing mania. My understanding is this is what Ambrose Evans-Pritchard has been advocating.   The thinking here is that the flood of money and the low rates will eventually jump start the economy. No deficit spending needed.
3. Monetary and fiscal stimulus.  Full tilt Keynesian. This is the Krugman view. The thinking here is that one needs to credibly commit to higher inflation and close the output gap to avoid a deflationary spiral. If that is insufficient, then one needs to go full bore on fiscal stimulus aka deficit spending. And if that doesn’t work, subsidize jobs. The New Deal is commonly seen as the gold standard response.
4. Fiscal stimulus only. Deficit spending. I have been talking up this view. The thinking here is that we need to both close the output gap to prevent a deflationary spiral and revive private sector savings in order to promote deleveraging.

There is no magic bullet here.  We are living through a situation unique in time with few historical precedents. And there are a lot of competing ideas being tossed about. So policy makers are groping around, desperately seeking the holy grail of depression-busting economic policy.  In that regard, I don’t envy them. They are certainly going to make a lot of mistakes. It may seem at times that I don’t realize this given the harshness of my critiques, but I do.

Deficit hawks are misguided

However, there are some policies which could work and others which are flat out wrong.  One policy which is flat out wrong is the concept that we need to reduce deficit spending in order to avoid a double dip recession. This flies in the face of basic economics which says that more spending and less taxes equals greater demand and recovery/boom. More taxes and less spending equals less demand and recession/depression.

Now, it’s not as if we didn’t see this line of argument coming. As far back as November 2008, I heard the chatter (see my post here). So you knew this we-have-to-stop-or-we’ll be-bankrupt nonsense was coming. The problem is it’s just not true.  Here are a few data points:

• Private sector debt (incl. financial firms) was 292% of GDP as of Q2 but public sector debt (incl. state and local municipalities) was 67.2%. Who’s more indebted – the private sector by a factor of 4.
• Adding unfunded liabilities to any public debt number when talking about spiking treasury rates is inaccurate and artificially inflates the number. A lot of people do this to make the public debt scenario look worse. The issue at hand is whether a supply/demand imbalance in Treasury securities spikes interest rates. Unfunded liabilities have absolutely nothing to do with this.
• Cash and bonds are fungible. They are both obligations of the federal government to be repaid in full with a specific sum of fiat money. The Treasury could literally stop issuing government debt altogether and just start crediting accounts electronically to ‘fund’ its purchases. There is no operational constraint to government spending. The U.S. government is not going broke involuntarily. See my post here.

The real issue with deficits causing a double-dip has to do with inflation and overheating. If inflation increases because the economy begins to overheat, interest rates spike and the Fed raises rates to choke off inflation. That’s not going to happen any time soon – although it may be a problem down the line.  The issue at hand now is deflation not inflation. At least Morgan Stanley understands this when they take a deficit hawk position.

And as for the Chinese, they are not going to pull the plug on Treasuries unless they want to tank their export boom. The reason they must buy Treasuries is the dollar peg; they must re-invest in U.S.-based assets in order to prevent their currency from appreciating. This has caused a huge rise in their U.S. dollar reserves. If they changed the peg, their currency would almost certainly rise and this would choke off exports.

No more stimulus, just jobs

I have said my piece about the need for stimulus in the past. So I won’t repeat it here. If you are interested, see my December 2008 posts “Confessions of an Austrian economist,” “What does Mises say about trying to stimulate the economy out of recession,” and “A brief philosophical argument about the role of government.”

But, on the whole, I look at long-term deficits in a dubious light. There are practical constraints to deficit spending – and they lead to inflation, currency depreciation and lower standards of living. This is not national bankruptcy, but it is what Murray Rothbard called default by inflation and it makes you and me less well off.

This, of course, is over the long-run. In the short run, it is the spectre of a deflationary spiral we care about. Stimulus was important to stop this. I said in February that Obama was making a big mistake with his stimulus measures.

My view here is that Obama is forging a middle path that leads to a dead-end. The stimulus is not nearly enough by half to get the job done. The proposed deficit reduction measures for 2013 are outright scary as they risk repeating a mistake from the 1930s. And the banking sector and mortgage plans, both of which I failed to mention, are dubious half-measures as well. One needs to act aggressively and proactively or not at all.

If you are going to deficit spend you need to do it in a big way. You need to stop the deflationary spiral.  That means hitting the reset button by promoting private sector savings and deleveraging and purging all built-up malinvestments. The risk in addressing the situation this way, of course, is replacing the imperfect invisible hand of markets with the imperfect hand of politicians and legislative fiat.

This is a risk I no longer see as worth taking. I have bailout and deficit fatigue just like most Americans. It is abundantly clear that this Administration has absolutely zero intention of purging any malinvestment or promoting any deleveraging. All they want to do is continue business as usual and go back to the asset-based economy that caused this mess. This is why we have seen bailout after bailout coupled with easy money. It makes for record profits on Wall Street but it does nothing for the unemployed.

Moreover, the political process in the U.S. is such that any stimulus money will be diverted to pet projects and used to pay off political constituents. While this may increase aggregate demand, it does so at the risk of serious social unrest as the outrage will certainly spill over into populism.

So I say no to a second (third) stimulus package.  What the President needs to focus on is jobs. The reason Obama’s poll numbers are shrinking is because he now owns this economy.  And people are not benefitting from this fake recovery.  They are angry at the bailouts and distrustful of government – and with good reason.

Cut payroll taxes, subsidize job creation, divert some military spending to direct job creation by ending the foreign wars. But stop the madness.

Related posts:

• Japan does not demonstrate the failure of stimulus
• Don’t underestimate the power of printing money, part 2
• Inflation: The strategy that dare not state its name
• The inflation-deflation debate
• Barack Obama: “if we keep on adding to the debt… that could actually lead to a double-dip”

Video embedded below

Related posts:

• Bill Gross thinks the June unemployment data is bad
• Bill Gross: Fed on hold through 2010
• Bill Gross: Sell equities and buy Treasuries
• Bill Gross: “almost all assets appear to be overvalued on a long-term basis”
• The $1 trillion deficit: has Bill Gross gone crazy?

The Mortgage Bankers Association is reporting that nearly one in ten households with mortgages are at least one payment behind.  That is a record, my friends. And it certainly means we cannot believe house prices have permanently stabilized.

The New York Times says:

The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.

Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.

Translation: there are a lot writedowns in residential real estate still coming. This is one reason bank credit is not going up significantly despite zero interest rates. Remember when I wrote about “extend and pretend?” This is the kind of thing that is holding up bank balance sheets. The article I wrote in October on short sales in North County San Diego highlights the issues involved. But at some point banks will have to take the hit (unless house prices magically go up to near previous levels – what everyone except renters wants).

Ivy Zelman has the same sinking feeling I do here; we don’t think house prices are necessarily heading up permanently. She even throws in a mixed metaphor to get her point across. She says:

I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down.

Look, the fake recovery is now in full swing.  But I expect the recovery to hit a brick wall by 2011, if not earlier. While the proximate cause of my concern is the likelihood of increased taxes and/or reduced spending by the Obama Administration, it is jobs that concern me. See Calculated Risk’s post showing the correlation between unemployment and mortgage delinquency and you see the connection. The fact is we have a record number of foreclosures and that is a direct result of rising unemployment. Unemployed people don’t have any money, so they don’t pay mortgages. It’s as simple as that.

The interesting bit about the New York Times article was this:

The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.

The fact is the F.H.A is the next Fannie Mae. If you’re looking and wondering where the next bailout will be, take a good look at the F.H.A. Not only is this agency guaranteeing hugely delinquent loans, but the Economic Stimulus Act of 2008 doubled the maximum loan that it could insure to $729,750 in order to cover jumbo mortgages common in cities like New York, San Francisco or D.C.. The purpose was to give liquidity to the frozen jumbo market in high-cost cities.  However, the net effect is that the F.H.A was expanding at exactly the time when loan quality was falling. There will be significantly more losses as delinquencies mount.

To make matters worse, the F.H.A. has an abysmally low 0.53% insurance reserve ratio – that’s the lowest ever. Yes, this ratio includes expected future losses, but you don’t have to be a rocket scientist to know any downside wipes these guys out. And that means more taxpayer money will be forthcoming.

Is this a pretty picture? No. But, is this what is going to happen? Of course it is.  So when the bailouts come because the foreclosures begin again in earnest and politicians start saying, “who could have known?” you will have every right to be disgusted.

Related posts:

• UK home prices fall in June
• A Home Price Firewall
• Can I borrow the full amount and an extra 25% too?
• Foreclosures hit a record in April
• Extend and pretend and the growing divide between delinquencies and foreclosures

This excerpt comes from the blog News from 1930 which gives us a day-to-day account of what was being reported in 1930 before the worst of the Great Depression hit.

“The unemployment situation in New York is critical. Unless it is speedily met, we face a winter of hunger and distress for families whose bread-earners are without work and without funds. The great majority of family men now unemployed are asking not for charity, but for a job. In the richest city of the world, where the vast majority are at work, it is unthinkable that anyone should be permitted to starve. The Emergency Employment Committee is composed of New York business and professional men, formed at the request of experienced welfare organizations of the city. It is raising funds which will be used by these organizations to give temporary work to heads of families and to relieve distress caused by unemployment without regard to race, creed, or color.” Followed by endorsement from Pres. Hoover and appeal for funds.

Sen. Smoot denies tariff is retarding business recovery, says it has saved thousands of jobs and helped maintain wages and preserve farm purchasing power; points out only one country has increased its tariff since US adopted revisions; says question now is whether tariff is high enough, not whether it is too high.

I find the parallels to present day frightening to say the least. Let’s hope for some serious divergence.

Related posts:

• Black humor on Wall Street circa 1930
• Unemployment: U-6 data versus the Great Depression
• Food insecurity: alternative measure of economic distress skyrockets
• “That’s what happens when a town full of broke people gets a whiff of free money”
• When is the next panic?

The US Department of Agriculture highlights how the United States in the last decade, despite increased aggregate wealth, slid back significantly in terms of food insecurity as measure of poverty. With everyone now focused on the unemployment situation, it bears noting that even before the downturn in the economy there had been a large surge in food insecurity nationwide.

The Guardian says:

Food insecurity – defined by the USDA as when "food intake … was reduced and their eating patterns were disrupted at times during the year because the household lacked money and other resources for food" – afflicted 14.6% of Americans in 2008. ie, some 50 million people were too poor to guarantee being able to put food on the table.

The table below, also from the Guardian, shows where food insecurity is highest. While much of the distress is concentrated in the South, there are plenty of states in the Southwest and West as well. Maine has the highest food insecurity in the Northeast.

My interpretation of the data goes to income inequality. I see this as evidence that the last decade of growth in the U.S. has not been beneficial for poorer Americans. However, I would go further in saying that the downturn in the U.S. and rising unemployment, bankruptcy and foreclosure in the middle class has made plain that the middle class has also been left behind. While distress amongst poorer Americans is plain from these numbers, the diminished position in the middle class was masked by a surge in debt. This was made plain only as a result of a drop in asset prices.

At present, U.S. policy makers are trying to make this problem go away by reflating an asset bubble, but continued high unemployment is the elephant in the room which higher asset prices can not make disappear.

As for the poor, a related Guardian article gets to the heart of things:

The report said 6.7 million people were defined as having "very low food security" because they regularly lacked sufficient to eat. Among them, 96% reported that the food they bought did not last until they had money to buy more. Nearly all said they could not afford to eat balanced meals. Although few reported that this was a permanent situation throughout the year, 88% said it had occurred in three or more months.

Nearly half reported losing weight because they did not have enough money to buy food.

The number of children living in households where there were shortages of food at times rose by nearly one-third to 17 million. The report says that most parents who did not get enough to eat ensured their offspring received sufficient food but that more than 1 million children still suffered outright hunger.

The worst affected states are in the south with Mississippi having the largest proportion of its population enduring shortages of food followed by Texas and Arkansas. More than half of those affected are minorities, principally black people and Hispanics.

Millions more Americans do not go hungry only because they are so poor they receive government food stamps or rely on handouts from food banks such as Feeding America. In some states, such as West Virginia, one in six of the population is on food stamps.

This is certainly the stuff of depressions more than V-shaped recoveries. The first Guardian article has links to the data for downloading.

Source

Hungry America: food insecurity, state by state – Guardian

Record numbers go hungry in the US – Guardian

Related posts:

• News from 17 November 1930: “we face a winter of hunger and distress”
• If you can’t afford food, steal it: lessons from Japan
• “That’s what happens when a town full of broke people gets a whiff of free money”
• Massive U.S. job loss of 598,000 in January
• 467,000 jobs lost in the U.S. in June 2009

Nouriel Roubini, writing in the New York Daily News , said on Sunday that “unemployed Americans should hunker down for more job losses” given the likelihood of a job less recovery. This was as gloomy a piece as I have seen from Roubini in the past few months. He has clearly become more downbeat about the long-term picture for the U.S. economy.

The article begins:

Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%…

…we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.

This sounds dire. As a result, Roubini goes on to call on the Obama Administration to take direct action on jobs. Extending unemployment benefits is not going to cut it.  Roubini says we need:

a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

With statistics showing that the rate of long-term joblessness is at the highest since the Great Depression, Roubini joins an increasing number of economists who are calling on the Obama Administration to take the employment situation more seriously.

Paul Krugman has said that we are now in a liquidity trap. Therefore, we need to subsidize jobs and promote work sharing as Germany is doing.

I have made similar arguments about quantitative easing for the past year. Monetary policy is effectively useless – and is merely creating bubbles.

The Obama Administration is moving into deficit hawk mode at the wrong time as this will only worsen the jobs situation and lead to a double dip recession. Instead, I have called for a payroll tax cut or a job subsidy.

Randall Wray, a professor at the University of Missouri-Kansas City, has also offered a unique job solution.

All of this is urgent, as Roubini indicates:

Based on my best judgment, it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more.

The weakness in labor markets and the sharp fall in labor income ensure a weak recovery of private consumption and an anemic recovery of the economy, and increases the risk of a double dip recession…

The damage will be extensive and severe unless bold policy action is undertaken now.

The Obama Administration is taking an ‘indirect’ approach. They do so for three reasons. First, they are afraid of being boxed in politically by taking more direct measures. They also see a need to defend their previous policy decisions.  But, Mark Thoma thinks part of the resistance to more direct measures is ideological.  In a post earlier today, he says:

Growth policy is an attempt to make the economy grow faster, and stabilization policy attempts to keep the economy as close as possible to that trend, i.e. to avoid business cycles.

When Republicans had the political microphone, they emphasized growth policy (because it allowed them to argue for what they really wanted, lower taxes, growth policy was simply the vehicle that allowed them to get there), and this was supported by academic work from people such as Robert Lucas who claimed that, from a welfare perspective, stabilization was of second order concern, growth policy was where policymakers should focus their effort if they wanted to enhance welfare. Summers’ remarks reflect this type of thinking.

The Obama Administration’s approach of focusing on deficit reduction without enough direct job measures is sure to keep unemployment elevated. In looking at the politics of economics I said recently:

I see jobs as the first area for Obama to attack. The question is whether he does this directly via some modified private-sector controlled W.P.A.-type program or indirectly via something like a payroll tax cut. After jobs comes foreclosure. Personal income and taxes are the least important area going forward (especially as any tax cuts will either increase deficit spending or have to be made up by tax increases elsewhere).

The Obama Administration is doing the opposite. They seem to have received the ‘deficit reduction comes first takeaway’ from recent state elections in Virginia, New Jersey, and New York instead of the ‘jobs come first takeaway.’ That is bad news for Democrats and it is also bad news for the hopes of a sustained recovery.

Source

The worst is yet to come: Unemployed Americans should hunker down for more job losses – Nouriel Roubini, NY Daily News
Job Losses Mount, Enduring and Deep – Floyd Norris, NY Times (the long-term unemployment image is also from this story)

Related posts:

• Comprehensive unemployment rate is 17.5%
• 467,000 jobs lost in the U.S. in June 2009
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• 10.2% unemployment, 190,000 jobs lost
• Unemployment rate to 9.7%, 216,000 jobs lost

Today, I want to run a few thoughts by you courtesy of John Mauldin.  In his recent weekly newsletter, he makes a number of points I have made here over the past few weeks and comes to a similar conclusion about the weakness of recovery and the likelihood of a double dip recession.

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:http://www.frontlinethoughts.com/learnmore

No one goes into Wal-Mart and asks to pay extra sales tax. Thus sales taxes are reasonable barometers for retail sales. This week we look at how taxes are doing in a period of economic recovery. Then we turn our eyes to a very interesting (and sobering) analysis of possible future unemployment rates. This is an anecdote to the happy-face analysis of employment numbers you get from establishment economists. There will be a lot of charts and tables, so this letter may print a little longer, but I think you will find it very interesting.

If This is Recovery, Where Are the Taxes?

I keep reading about surveys that show that retail sales are up. But as noted above, no one pays extra sales taxes, or decides they need to pay more income taxes. The surest way to measure retail sales is sales taxes. Want to know how incomes are doing? Look at income tax receipts. Let’s look at sales taxes first.

First off, I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we’re in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.

There is a very revealing study by the Pew Center on state taxes, called "Beyond California" (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.

On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. You can see how your state fares at http://downloads.pewcenteronthestates.org/Beyond_California_Appendix.pdf.

The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (www.theliscioreport.com)

Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government figures show that retail sales were down 1.5% in September from the previous month and 5.8% year-over-year. So how do we keep seeing headlines about retail sales being up, as unemployment keeps rising?

Remember that such reports are usually based on surveys, and generally cover mid-sized and up retailers, leaving out smaller businesses. Further, if you are a retail chain that has closed 10% of its stores, the remaining stores should in theory benefit from getting your loyal customers into them.

Last Business Standing

Yesterday I was with an associate, and I hesitated in asking them how their business was doing, because I knew things had been tough at the beginning of the year. But I did ask, and they said sales were up over the last months and business was looking better. Surprised, I asked them what made the difference. "Ah," they said, "less competition. Our competitors have gone out of business."

Best Buy and other electronic retailers had to benefit from Circuit City disappearing. That is Schumpeter’s creative destruction at work. Not very good for total employment, but it does help the profitability of the survivors.

So, if things are so bad, how did we have 3.5% growth in the third quarter? First off, things are not as bad as they were in the past year. We are in fact getting close to an economic bottom, at least for now. Second, the 3.5% number is a preliminary estimate. A study by Goldman Sachs suggests that the number will be revised down by at least 0.5% and maybe as much as 1%.

Why? The estimate does not really take into account how poorly small businesses are performing. If you look at small-business indexes and compare them to historical GDP numbers, you get the smaller number mentioned above. And since at least 2% of the GDP was from the stimulus package (Cash for Clunkers, houses, tax cuts), the economy on its own was flat. That begs the question, what happens when the stimulus runs out?

And the answer is that we won’t know for some time, as the stimulus is just getting ramped up. "According to CBO estimates, only 21% of [the stimulus] spending will occur in 2009; another 38% will come in 2010, and 22% in 2011. After that, its effect will dissipate quickly." (The Liscio Report)

But David Rosenberg notes that what the federal government is giving, the states are taking away. The Pew Study shows that at least nine other states are in appalling shape, so it is no wonder that David writes:

Stimulus, What Stimulus?

"Fully nine states are in fiscal distress and only two have balanced budgets. States like Michigan are planning 20% budget cuts for the coming year. Indiana is planning a 10% spending cut in light of a 7.4% YoY revenue decline. How can the economy really be out of recession if government revenues are still deflating?

"The states are filling around 40% of their fiscal gaps with the federal stimulus (so much for spending on "shovel ready" infrastructure projects). Even after the fiscal help from Washington, the state governments will still face a projected deficit of $142 billion for 2011 (versus $113 billion in 2010). All in, the restraint in the state and local government sector is estimated to drain a full percentage point from U.S. GDP growth in 2010 and more than fully offset the stimulative efforts from Washington. The U.S. economy is more likely to post growth of little more than 2% next year, rather than the 5% currently being discounted by the equity market."

The Reality of Unemployment

All this is, of course, going to put continued pressure on employment. As I noted last week, the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey, not the 190,000 you read about in the mainstream media. Unemployment is sadly continuing to rise by significant amounts.

In August, I did an interview with CNBC from Leen’s Fishing Lodge in Maine. The unemployment numbers had just come out. I did a back-of-the-napkin estimate that we would need about 15 million new jobs over the next five years just to get back to where we were when the recession started.

That works out to a need for about 125,000 new jobs each month to handle new workers coming into the market (which comes to a total of 7.5 million over five years), plus the 8 million and rising jobs we’ve lost. That is a daunting number. It amounts to 250,000 new jobs a month every month for five years. And we are still losing more than that number a month, let alone adding the needed 250,000.

Look at the chart below. It shows the establishment survey employment figures for the last ten years. Only once, in 1999, did we actually add over 250,000 jobs a month for a whole year. And that was during the internet boom.

Sadly, the private sector has shed over 300,000 jobs since 1999. Think about that. We have had a decade where there have been no new jobs added by the private sector. Real incomes are roughly where they were, and the stock market is down. Talk about a lost decade.

I love it when someone does the really heavy lifting for me, and my friend Mike Shedlock of Sitka Pacific Capital Management has done a wonderful job of taking that speculation of mine and putting it into a spreadsheet that helps us get a real handle on what unemployment is likely to look like for the next ten years. I am going to make use of his basic analysis and then modify some of his assumptions in the spreadsheet he provided me, in order to think about different scenarios.

All three scenarios are based on assumptions, so let’s see what Mish started with. There is a wealth of data available from the Bureau of Labor Statistics and the Census Bureau. According to the Census Bureau Population Estimates we are going to add about 2.5 million working-age (16 years old and up) citizens a year, from now until 2020. The numbers varies slightly year to year. Mish used an estimate of the average, summing up the buckets from 16 to 100+ for the years in question and rounding the result.

You can go to the BLS site and look at Table A-1, which shows the civilian noninstitutional population (those over 16 not in prisons), the participation rate (those who are working and/or want to work), the unemployment rate, the number employed, those not in the labor force, and those who want a job. Those are starting numbers for the charts below.

For those interested, you can read Mish’s very full (and quite detailed) analysis at his blog site http://globaleconomicanalysis.blogspot.com/2009/11/mish-unemployment-projections-through.html). But let’s look at his assumptions:

• Job losses are likely to continue for a minimum of another year.
• When job gains start, they will be very slow at first, then pick up.
• An extremely generous monthly job gain stat over the course of the year would be 150,000 jobs.
• A falling participation rate (boomers retiring) will continue to mask reported unemployment.
• Starting in 2013 the labor pool will start decreasing because of Boomer demographics.
• The noninstitutional population will rise by 2.5 million workers a year.

The spreadsheet below needs a little explanation. Let’s start with the assumptions. Mike starts with current working-age population and adds 2.5 million people a year. He assumes that Boomers will retire at 65 (something which all the surveys say is not going to happen). And his last estimate is what the unemployment numbers will be. Everything else is based on those assumptions, which leads to the first column, or the expected unemployment number.

By the way, we know that everyone will want to make different assumptions. I am going to create three scenarios, but you can go to Mike’s blog and at the bottom of the post is a link to the actual spreadsheet. Have fun. Let’s look at scenario 1.

This assumes there is no double-dip recession, and jobs roughly rise along the same lines as the last recovery. Actually, Mish is far more optimistic, as in the very first chart you will notice that job losses were negative in the first year after the end of the recession and flat the second year. Mish has jobs rising by 120,000 next year and 600,000 the second year (2011), and then a fairly robust recovery. Below is the graph of the unemployment numbers under such a scenario.

Notice that unemployment stays at or above 11% for three years. Pessimistic? Mainstream and usually very optimistic Mark Zandi of www.economy.com predicted this week that unemployment would rise to 11% by the middle of next year, right in line with this scenario. Also note that total jobs rise by 14 million over ten years. Hardly doom and gloom. Again, Boomers all retire on time and there is no double-dip recession.

Let the Good Times Roll

What would it take to get back to 5% unemployment? I played with the spreadsheet and came up with the following numbers, which get us below 5% by 2020. I assume no recessions for the next ten years, and 2 million new jobs a year after 2011, which I start off with almost 1.5 million jobs. Of course, we have never done that, but let’s be optimistic.

And the graph below shows the unemployment numbers for the Good Times Scenario.

Want to get to 5% within five years? Add 3 million jobs a year starting now. With no housing recovery, a smaller auto industry, and financial firms getting leaner.

The Quick Double-Dip Scenario

When I called the last two recessions about a year before they happened, it was not all that hard. We had inverted yield curves, falling leading indicators, and a lot of other data that pretty much pointed to a recession. Believing that we had a housing bubble and a looming credit crisis also helped my conviction in calling the last recession.

I think we are in for a double-dip recession in 2011, yet I readily admit there will be little if any statistical evidence in advance this time. This is more of an instinct call. I have serious doubts that we can have what amounts to the largest tax increase of all time in what will be a very weak (albeit growing) economy, without putting us back into recession. And Speaker Pelosi thinks it is a smart thing to add another 5.4% surtax on what will already be a rising capital gains and dividend tax.

Taxing small businesses, and that is what the tax increase amounts to, is a very bad idea in a weak economy. Small businesses are where the job growth comes from. Taking money from productive businesses and giving it to government is a fundamentally flawed concept.

Now, if they decide to postpone the tax increase, or phase it in slowly, then maybe we avoid the double dip. But right now it doesn’t look like that will be the case. So, let’s quickly see what a double-dip scenario might look like. Let’s be optimistic and assume we only lose another 1.2 million jobs in the next recession, since we have already lost so many in this one (8 million and counting). And then the economy comes roaring back in 2012 with 1.5 million jobs and continues to grow rather smartly for the rest of the decade. No further recession. We absorb the tax increases and move on with our economic lives.

Unemployment under such a scenario would rise to just under 13% and stay above 10% for 8 years. Take a look at the chart and graph.

Think 13% is too dire? This week David Rosenberg said unemployment would rise to between 12-13%. The former Merrill Lynch economist was one of the few mainstream economists who called the recession and the credit crisis. The so-called "Blue Chip" economists told us at the beginning of 2008 that unemployment would peak out at 6%. While Rosie is not optimistic of late, he has a rather solid record of being right.

We are at 10.2% unemployment today. The economy lost jobs for 21 months after the end of the last recession. That would easily take us into 2011. Another million lost jobs will take us well over 11% and close to 12% (remember, you have to add in the increasing population), even without my double-dip scenario.

The letter is getting long and it’s getting late, so let me close with a few thoughts.

First, 12% unemployment is horrendous by American standards. But Spain is now at 20%, and much of Europe has been in the 10% range for years.

Second, Americans are not used to the concept of 12% unemployment or 10% rates for extended periods. That is going to cause a serious backlash across the political spectrum. Couple that with the discomfort over $1.5-trillion deficits and there could be some serious political changes in the coming years. I think the message will be more anti-incumbent than one party or the other.

Third, the only way out of this morass is to create an environment where small business can thrive. As I’ve noted for the last several weeks in this letter, government spending does not increase GDP over time. It is a temporary nonproductive stimulus. It takes private investment to create jobs and increase productivity. Over the next few months, I will write more about how to do that.

Related posts:

• Comprehensive unemployment rate is 17.5%
• Payroll data mixed despite the bullish headline job loss figure
• Are jobless claims pointing to structurally high unemployment?
• Unemployment numbers still point to partial recovery
• US unemployment hits 5-year high of 6.1%

This morning, David Rosenberg of Gluskin Sheff had another wonderful piece. I am only going to take on one part of it here. I have linked to the full article below so that you can read his analysis in it’s entirety (registration free but required).

The part I want to focus in on has to do with GDP revisions. Basically, the GDP numbers the U.S. government releases are always revised when more complete data come in. Often the data come in years later via tax returns and other slower-to-report channels, so we can get huge disparities in what was reported at the time and what ends up being the final data series. Rosenberg thinks Q3 is going to see major, major downward revisions because of small businesses.

He says the following (highlighting added):

We noticed an interesting piece of research on U.S. GDP from Goldman Sachs’ Economics team that’s worth highlighting. The team questions whether the official government GDP statistics capture how poorly small businesses (ie, sole proprietorships) are doing. The weakness in small business sentiment is seemingly at odds with the recent 3.5% Q3 GDP reading but may explain why the unemployment rate has continued to steadily increase. Part of the reason for small business weakness is that most don’t have the same access to credit as larger firms and larger firms’ output tends to be better captured in the GDP data. While sole proprietorships tend to be small they collectively account for a nontrivial 17% of the U.S. economy.

The Goldman team uses a couple of different statistical approaches to test their thesis. They use timely data from the National Federation of Independent Business (NFIB) confidence survey, which shows that despite a recent improvement, confidence remains exceptionally weak (in fact two standard deviations below long-run trends). The first model suggests that the NFIB survey is consistent with overall GDP growth of 2.5% to 3.0% — not the 3.5% reported. As well, they find that current NFIB readings are more in line with below-50 readings on the ISM manufacturing index versus the actual reading of 55.7.

The second approach has to do with revisions to the GDP data and their relationship to the NFIB. U.S. GDP goes through many revisions as more, and better, information becomes available with lags — historically preliminary numbers are revised down by almost 0.5 percentage point. This second model suggests that Q3 GDP could be revised down by as much a 1-2 percentage points.

Translation: small businesses are suffering disproportionately because of a credit crunch. Their pain is not adequately reflected in the numbers because of big company bias in real-time data. GDP growth is probably much lower than we realize.

This view is consistent with the dichotomy in the BLS (Bureau of Labor Statistics) household survey used to calculate the unemployment rate and the establishment survey used to calculate non-farm payrolls.

See the data below and pay attention to the area highlighted in red:

That shows employment levels dropping off a cliff over the last three months in the household survey. While I question the magnitude of the fall given the weekly jobless claims data, these numbers are much worse than the job losses seen in Non-farm payrolls. Directionally, this has to be right, meaning the 530,000 weekly claims was probably translating into something more like 300,000 job losses than the 200,000 reported. Again, underreporting of small business distress explains the difference.

My conclusion based on that we are still seeing about 500-510,000 jobless claims is that we are around a 200,000 job loss level at present.

As for third-quarter GDP growth, it is most certainly lower than 3.5%. How much lower? We won’t find out for years to come.

Toast with Dave (pdf)– David Rosenberg, Gluskin Sheff

Related posts:

• GDP revisions are out
• Last week’s employment numbers
• Rosenberg: “the mother of all jobless recoveries”
• GDP benchmark revisions coming on Friday
• US GDP comes in at minus 1%

L. Randall Wray has a post up at New Deal 2.0 which puts forward an idea which is pretty innovative. I would label it a private sector replacement for unemployment insurance. It’s the kind of thinking that might bring Obama out of a policy cul-de-sac as the economy hemorrhages jobs.

Let me present an excerpted version and mention a few concerns one might have with this idea. The link to the full post is at the bottom:

The latest jobs report shows that the official unemployment took a huge jump to 10.2% –15.7 million jobless workers. If we add to those numbers involuntary part-time workers, plus those who have given up looking for work, the unemployment rate is 17.5%. Even that seriously undercounts those who would be willing to work if decent jobs at decent pay were readily available–a number I put at 25 to 30 million…

I am advocating… a universal job guarantee available through the thick and thin of the business cycle. The federal government would ensure a job offer to anyone ready and willing to work, at the established program compensation level (including wages and a healthy benefits package). To keep it simple, the program wage could be set at the current federal minimum wage ($7.25 an hour), and then adjusted periodically as that is raised. The usual benefits would be provided, including vacation and sick leave, and contributions to Social Security.

Let’s call this the Job Guarantee (JG) program.

… A permanent and universal JG program should be decentralized, with projects created and administered locally–where the workers are, and for the benefit of their communities. The federal government would provide the wages, plus a portion of capital and supervisory expenses (perhaps capped at 25% of total wages paid for each JG project). Local governments and nonprofits would propose projects and cover the rest of the expenses. State unemployment offices would be converted to employment offices, helping to match workers and projects.

Project proposals would be submitted to regional councils and, if approved, would be evaluated by state councils and then by a federal council. Wages and benefits would be paid directly to workers (using Social Security numbers and direct bank deposits) to minimize fraud. Organizations submitting proposals would be prevented from replacing paid workers with JG workers. For-profit business would be excluded, because the temptation to substitute would be too great. At the same time, businesses would be protected from unfair competition because all JG projects would have to demonstrate they’d fulfill unmet public purposes. If at some future date, a for-profit firm decided to provide services that a JG project is performing, the JG project could be phased out. There is neither need nor desire for the JG program to compete with the private for-profit sector.

…JG workers will be gaining useful work experience and training, making them more appealing to other employers. When firms hire, they will recruit from the JG program, offering a slightly higher wage.

At the same time, the program’s fluctuation allows it to act as an employed “buffer stock”-or “reserve army of the employed”-helping to attenuate the business cycle while maintaining full employment without setting off a wage-price spiral. An economic boom will shrink the size of the JG program; in a recession the program will grow.

Thus, an effort like the Job Guarantee program I am proposing would act as an automatic stabilizer — a feature most would agree is desperately needed in our current rollercoaster economy.

This is definitely outside the box thinking. It is basically a decentralized counter-cyclical works program to largely replace the unemployment insurance program we presently have.

The benefits I see are that it maintains full employment by putting to work those that would be idle and collecting unemployment insurance.  We have an enormous number of unemployed people who are drawing significant social welfare payments (five million are drawing unemployment insurance according to my latest post). Why not use a lot of that same money and deploy them.

This approach also would employ a huge slew of longtime unemployed workers that have benefits expire and skills languish, making them harder to employ and increasing structural unemployment.  The job guarantee could then reduce the level of structural unemployment that results from a steep downturn (see Mark Thoma’s recent piece on structural unemployment for a cogent explanation of that issue).

In my view, full employment is compatible with free market capitalism. In this approach, a job guarantee is there for anyone who wants it. Any structural unemployment will be largely voluntary.

Here are my questions. I am going to present what I consider the standard questions using the standard terminology – not because these are the exact questions I have but because these are the questions I would anticipate. I have run these same questions by a few economists to generate some answers. I have incorporated most of their answers. But, I still would like to hear your thoughts as well.

1. Isn’t this just an attempt to expand the state i.e. be a move toward big government? Why shouldn’t we expect ‘mission creep?’ Since the idea is designed to fluctuate with changes in the economy, it seems less of a concern. Yes, this is the not-for-profit private sector. But, we would still need to flesh out the safeguards to make sure that it didn’t crowd out investment in the for-profit sector. (You should expect this program to increase the pie and expand investment in aggregate, so that certainly mitigates these concerns as well.)
2. Won’t this misallocate resources and create malinvestment?  Since it is designed to be an automatic stabilizer i.e. countercyclical, it doesn’t necessarily appear so. But, it still might create misallocations by increasing the propensity to spend excessively on infrastructure. Infrastructure spending in the U.S. is probably too low at present.  But, at some point in the future, this will be a concern. The fact that much of it can be administered in the private sector locally is important in this regard.
3. How much will this cost? How do we pay for this? As I understand the idea, it is designed to replace unemployment insurance entirely – and that means we will recoup in taxes lost output from cyclical and structural unemployment. But, as the Federal Government is paying not just wages but benefits, it does not seem to be a deficit neutral strategy in a employer-provided health-insurance world. If health insurance became detached from employers that would be less of an issue. But, that’s not going to happen. (I should also point out criminality and imprisonment associated with lack of job opportunities would be reduced, so that certainly decreases any costs – both social and monetary).

Personally, I am not especially keen on the ‘New Deal’ terminology in the original piece.  That goes to political/philosophical predisposition. So I have stripped it of that language here.

As an aside, of 1920s and 1930s Democrats, I find Al Smith, the Governor of NY and 1928 Democratic Presidential candidate, far more interesting than FDR. Smith and Roosevelt had a very antagonistic relationship in no small part due to FDR’s co-opting of all of Smith’s 1928 ideas for FDR’s 1932 run. Al Smith was a first-generation Irish Catholic who grew up poor on the lower East Side of Manhattan and owed his rise to Tammany Hall. Prejudice is a big reason he lost to Hoover in 1928. Roosevelt was a blue-blooded Harvard-educated Aristocrat who was much more palatable to early 20th-century Americans. Try “Al Smith and His America,” or better yet “Empire Statesman,” for a good read on Smith.

I suspect Wray’s idea will gain more traction if it can be examined it in a politically-neutral frame.

Economists I have talked to who have studied this idea inform me all studies indicate the proposal has a 1-2% of GDP price tag.

Right now, President Obama seems like he is banking on a recovery that will bring unemployment down. But, this may not end up being so. From a purely political perspective, Wray’s suggestion is the direction Obama should go if he wants any traction on the unemployment issue should recovery not bring unemployment down.  But, Wray’s idea also deserves more discussion irrespective of the political ramifications because it keeps a buffer stock of skilled, employed people ready to hand for the for-profit private sector to employ.

Source

Navigating the Jobs Crisis: Time for a New ‘New Deal’ Jobs Program – L. Randall Wray

Related posts:

• Jobless claims dip in most recent week
• ADP Report: 697,000 jobs gone in February
• US unemployment hits 5-year high of 6.1%
• Irish unemployment gaps up by most in 40 years
• Spain: “we need to go back to 2000 wages and prices and start again”

You have probably heard the term money illusion.  I want to coin a related new term called unemployment rate illusion because I think it is significant in light of some of the things David Rosenberg said earlier today about the unemployment rate in the U.S.

Wikipedia’s definition of money illusion is good:

In economics, money illusion refers to the tendency of people to think of currency in nominal, rather than real, terms. In other words, the numerical/face value (nominal value) of money is mistaken for its purchasing power (real value). This is a fallacy as modern fiat currencies have no inherent value and their real value is derived from their ability to be exchanged for goods and used for payment of taxes.

The key here is that behavior changes in accordance with the nominal numbers used as economic signposts in an economy. This is one reason why governments are often accused of manipulating their economic statistics in order to present a more regime-friendly face (see here and here).

The parallel of money illusion to unemployment rate illusion is that a higher posted rate of unemployment can have a serious negative impact on consumer confidence and personal consumption (think balance sheet recession). All else being equal, higher unemployment rates mean lower confidence and consumption. So, a lower unemployment rate is a better unemployment rate as far as incumbent politicians are concerned.

Now, you don’t have to be a conspiracy theorist and think that the government is deliberately suppressing the unemployment rate to understand what I am about to say. You just have to understand economic cycles in the context of the note from David Rosenberg today.

What I am talking about is the second paragraph of a quote I highlighted (bolding added):

But in a nutshell, to be calling for a 12.0-13.0% unemployment rate is meaningless except that it is very likely going to be a headline grabber. The most inclusive definition of them all, the U6 measure of the unemployment rate, which includes all forms of unemployed and underemployed, is already at 17.5%. The posted U3 jobless rate that everyone focuses on is at 10.2% (though if it weren’t for the drop in the labour force participation rate, to 65.1% from 66.0% a year ago, the unemployment rate would be testing the post-WWII high of 10.8% right now). The gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally this spread is between 3-4 percentage points and ultimately we will see a reversion to the mean, to some unhappy middle where the U6 may be closer to 15.0-16.0% and the posted jobless rate closer to 12%. This will undoubtedly be a major political issue, especially in the context of a mid-term elections and the GOP starting to gain some electoral ground.

Let me put this quote in unemployment rate illusion terms:

• People pay attention to the posted U-3 rate of unemployment. Right now it is 10.2%, which is high.
• However, it could be much higher – 10.8% – because a lot of people aren’t getting counted. They are dropping out of the labor force and artificially suppressing the labor force participation rate. This will change when recovery takes hold as a better economy brings back those discouraged workers.
• It’s even worse than that because, U-6, the most comprehensive rate of unemployment is sky-high at 17.5% and much higher relative to the posted rate than is normal. Even if U-6 declines to 15-16.%, using a normal gap to the posted rate gets you a posted rate of 12-13%. Nothing has changed, discouraged workers have re-entered the labor force. It is unemployment rate illusion.
• If people see 12-13% in 2010, they will be floored, angry, and looking for someone to blame. As Democrats control Washington, they will get the lion’s share of the blame and lose big time in 2010.
• Making matters worse, this is the kind of shock that causes people to put their checkbooks away and go home for the night a.k.a sending us into a double dip recession.

This is a case where unemployment rate illusion is definitely not a good thing.

What to do? 

Well, if you’re the President, you have to under-promise and over-deliver. President Obama has been doing exactly the opposite. Of course people are going to be angry when you promise 8.0% unemployment and instead we get 10.2%. Right now, Obama should be talking about 13% unemployment.

Moreover, Obama needs to throw his weight around. He should be telling people publicly, “my policy team is telling me that if we don’t get what we want through Congress, this fragile and unsatisfactory recovery will crumble and we will see 13% unemployment or much worse. And it will be the Republicans fault that this happened.”

Then he should turn to the Republicans and say, “give me everything I want or the economy will crumble and I will make sure you get the blame.”  Remember, that’s what Hank Paulson did and it worked brilliantly (a 777-point implosion in the Dow helped). What is the Republicans’ BATNA (best alternative to a negotiated agreement)? Nothing.

If you’re a Republican you should continue on the same course. Obama shot himself in the foot in January and February by not taking the Hank Paulson approach. Now, you get to label him a ‘socialist’ or anything you want. And you get to tell people that stimulus is budget-busting pork designed for the Democrats’ union buddies that doesn’t work and bankrupts America. It’s been working so far. Given the fact employment is likely to rise to a post-Great Depression high, why wouldn’t you continue on the same path? Don’t fix what’s not broken.

…coming soon to a TV screen near you.

Related posts:

• Rosenberg: U.S. unemployment rate headed for 12.0-13.0%
• Comprehensive unemployment rate is 17.5%
• Unemployment: U-6 data versus the Great Depression
• Consumer confidence sinking
• A note on government statistics and unemployment

David Rosenberg thinks the unemployment rate is headed much higher than anyone anticipates.  If you recall, back in January when the stimulus package was crafted, the Obama Administration felt that passing the bill would mean an unemployment rate which would top out at 8.0%. As the situation deteriorated, the President recognized that 10.0% was more likely – a number we just got last week. But Rosenberg is the only one (except Meredith Whitney) who is talking about 12-13%.

As an aside, it was interesting to hear Whitney at about 3:15 into the third video in the link above from July. Right before she gives us the dreaded 13% number, she admits to lowballing her house price decline estimates in order not to be dismissed as wildly out of step with consensus. That pressure is something I discussed here.

Here’s what Rosenberg says:

There are serious structural issues undermining the U.S. labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop. The bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market.

But in a nutshell, to be calling for a 12.0-13.0% unemployment rate is meaningless except that it is very likely going to be a headline grabber. The most inclusive definition of them all, the U6 measure of the unemployment rate, which includes all forms of unemployed and underemployed, is already at 17.5%. The posted U3 jobless rate that everyone focuses on is at 10.2% (though if it weren’t for the drop in the labour force participation rate, to 65.1% from 66.0% a year ago, the unemployment rate would be testing the post-WWII high of 10.8% right now). The gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally this spread is between 3-4 percentage points and ultimately we will see a reversion to the mean, to some unhappy middle where the U6 may be closer to 15.0-16.0% and the posted jobless rate closer to 12%. This will undoubtedly be a major political issue, especially in the context of a mid-term elections and the GOP starting to gain some electoral ground.

As I indicated when the employment numbers came out last week, we should expect the labor force participation rate to increase during recovery as discouraged workers come back into the labor force. The fact that the opposite is still happening means the unemployment rate will move higher (although 13% is sure to induce a double dip and I am not seeing this as a base case at this time).

Rosenberg’s political calculus also seems accurate.  In my post, “the politics of economics” I said that President Obama needs to take more blunt measures to deal with the unemployment situation head on.  Indirect measures are not going to be effective enough to prevent Democratic losses in 2010. Moreover, a recent poll released by Gallup today says that Republicans have now edged ahead of Democrats for 2010. If we see 12 or 13% unemployment, it will be much, much worse than that for the Democrats – and if Obama thinks getting his agenda through now is difficult, wait until 2011 when he may have to contend with more Republicans in Congress.

More of Rosenberg at the link below.

Source

Breakfast with Dave, 11 Nov 2009 (pdf) – David Rosenberg, Gluskin Sheff (free requires registration)

Related posts:

• Unemployment rate illusion
• Rosenberg: “the mother of all jobless recoveries”
• Unemployment Report: biggest rise in rate in two decades
• Comprehensive unemployment rate is 17.5%
• Spain: Bleak forecast puts unemployment at 22% in 2010

While I see the job numbers as pretty much what was expected, the data do make clear that we are seeing a major jobless recovery. David Rosenberg has a piece out today that goes right to the heart of the issue:

All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush.

But while Uncle Sam can try and stimulate spending on autos and housing and even mortgage credit via the myriad of policy measures that have been undertaken, the return to job creation is as elusive as ever. It is hard to fathom that, according to the White House estimates earlier this year, the stimulus was supposed to help cap the unemployment rate at 8.5%. Here we are today with both an unemployment rate and a fiscal deficit-to-GDP ratio both north of 10%. While real GDP did manage to rebound at a 3.5% annual rate in Q3 — stagnant if not for the government incursion — those dual 10%-plus figures cited in the previous sentence highlight the fact that GDP is not the only barometer of a nation’s economic health.

TODAY’S HEADLINE PAYROLL PRINT CONTAINED TROUBLING SIGNPOSTS
While the government can try to induce people to spend, no recovery can be sustained without a resumption in job growth and October’s employment data contained some troubling signposts.

While the -190,000 headline nonfarm payroll print was not that far off the consensus, and while there were upward revisions to the prior two months (of over 90,000), the major problem is that the Establishment Survey, at this time, is missing a very important part of the story, which is the strain that the small business sector continues to face. Small businesses have less cash on the balance sheet, less access to credit and less exposure to overseas growth dynamics compared to large companies. The Establishment Survey (nonfarm payrolls), has a “large company” bias that the companion Household Survey does not have. If you look at the historical record, you will find that at true turning points in the economic cycle, the Household Survey leads the Establishment Survey. This has always been the case heading into expansions and into recessions.

My interpretation of this is threefold:

• The headline data understate the severity of the problem because of “large company” bias and a low labor force participation rate. In reality the U-6 number of 17.5% is more reflective of the state of the economy – and that is a depressionary number.
• To the degree you expect the recovery to continue, labor force participation rates should be increasing, not decreasing. In my previous post, I failed to point this out, leading to the conclusion I saw the data as a net positive. I see the data as a net wash – as it was in line with expectations. However, when discouraged workers come back into the labor force, we are going to see a much higher headline unemployment rate.
• Given the fact that unemployment is pointing to depression but we are in a recovery, you should conclude that this recovery will fade once government stimulus is removed.

Lunch with Dave — U.S. Payrolls: 10-Plus (PDF, registration free but required) – David Rosenberg, Gluskin Sheff

Related posts:

• The weak employment situation summary for June 2009
• Payroll data mixed despite the bullish headline job loss figure
• Comprehensive unemployment rate is 17.5%
• U.S. employment data in line with estimates
• Payrolls fall by 159,000 in U.S.

The employment market is pretty grim. We’re talking a double digit unemployment rate – and that’s just the base rate. The comprehensive unemployment rate is now 17.5% in the US.  This is a fact not lost on our politicians. Today, Barack Obama signed a bill that extends unemployment benefits and home buyer tax credits. But,, let’s parse the data to get a real read of what’s happening.

The household survey

The unemployment rate is based on a household survey. Basically, the Bureau of Labor Statistics (BLS) asks a bunch of people, “do you have a job?  No? Are you looking? By asking enough different people these questions, the BLS can produce a statistic to represent the nationwide unemployment rate. That number is currently 10.2% – or 15.7 million of a labor force of 154.0 million in a population of 236.6 working age folks.

The two things to note are the rate 10.2% and the participation rate, now 65.1%, the lowest in 23 years. What this is telling us is that the actual toll of joblessness is much higher than 10.2% because a lot of people have given up looking for jobs.

The numbers above are all seasonally-adjusted. So, the true picture could be somewhat better because without adjustments the number of unemployed is actually 14.5 million, 9.5% of the active labor force and down from 15.2 million in August. Either way, it’s still a grim picture.

I actually like to watch year-on-year data as an indicator of directionality.  On this front, the report is looking much better. The increase in the number of unemployed is down from a peak of 6.0 million (6.2 million unadjusted) to 5.5 million (5.1 million unadjusted). So the year-on-year rate increase is now 3.6%, down from 3.9% in June.  Again, these numbers are grim (the peak y-o-y change was 1.8% in 2001, for example). But the direction of change is now down.

The establishment survey

This is where the BLS gets non-farm payrolls (NFPs), the number of job losses per month. Non-Farm Payrolls (130.8 million) are now at their lowest level since March 2004 (also 130.8 million). And if one goes back to the period before the previous recession, NFPs were 132.5 million in February 2001. That means we have lost 1.7 million jobs over a nine-year time frame. This is an ugly data point.

The silver lining here is that both unadjusted data and y-o-y changes are better. NFPs are now 132.0 million unadjusted and that is up 1 million from 2 months ago. year-on-year changes are now falling. Translation: the labor market is still grim, but the worst is over.

My read of the data is this: There were no big surprises. I expected losses of 200,000 based on the ADP number and the jobless claims numbers.  Yes, there was a jump in the unemployment rate, but jump was misleading because of a falloff in the labor participation rate. On the whole, the employment market is weak, but it is not deteriorating. Can we sustain a recovery even so? Probably.

Related posts:

• The weak employment situation summary for June 2009
• Unemployment rate to 9.7%, 216,000 jobs lost
• Payroll data mixed despite the bullish headline job loss figure
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• U.S. employment data in line with estimates

Average weekly hours a record low of 33.0. Stock futures now down. The household survey says we have lost 1.3 million jobs in three months. 17.5% U-6 unemployment. Median duration of unemployment is now 18.7 weeks from 15.4 just 3 months ago – ugly.

Here is an excerpt from the release (bolding added).

The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000), the U.S. Bureau of Labor Statistics reported today. The largest job losses over the month were in construction, manufacturing, and retail trade.

Household Survey Data

In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points. (See table A-1.)

Among the major worker groups, the unemployment rates for adult men (10.7 percent) and whites (9.5 percent) rose in October. The jobless rates for adult women (8.1 percent), teenagers (27.6 percent), blacks (15.7 percent), and Hispanics (13.1 percent) were little changed over the month. The unemployment rate for Asians was 7.5 percent, not seasonally adjusted. (See tables A-1, A-2, and A-3.)

The number of long-term unemployed (those jobless for 27 weeks and over) was little changed over the month at 5.6 million. In October, 35.6 percent of unemployed persons were jobless for 27 weeks or more. (See table A-9.)

The civilian labor force participation rate was little changed over the month
at 65.1 percent. The employment-population ratio continued to decline in October, falling to 58.5 percent. (See table A-1.)

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in October at 9.3 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

More info coming shortly.

Related posts:

• 467,000 jobs lost in the U.S. in June 2009
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• U.S. loses 533,000 jobs, unemployment rate up to 6.7%
• U.S. unemployment rate 7.2%, 524,000 jobs lost
• Unemployment rate climbs to 9.4%

When it comes to the housing meltdowns in the richest economies, the US has been matched only by Spain, Ireland and the UK. All four countries have seen spectacular losses of wealth in the housing sector over the last two years.

The response by all four governments was to apply as much stimulus as they reasonably could to prevent their economies from descending into free fall. This has opened up gaping holes in each countries’ government accounts. However, in contrast to the United States or the UK, both Spain and Ireland have the Euro as an external constraint which limits their policy choices.  This has resulted in credit downgrades for the sovereign debt in Ireland and Spain.

Looking at Spain, there was massive over-building in the property sector, which attracted a lot of labor to Spain. Now that these jobs have been vaporized, the unemployment rate has soared to near 18%. The problem is quite acute and there are few policy solutions. Reinforcing this point for me was a discussion I had with Spain-expert Edward Hugh, who writes at the blogs Global Economy Matters and A Fistful of Euros, in the wake of some downbeat comments by Paul Krugman about the country.

Edward wrote:

The problem is Spain can only create jobs through exports. The problem is, with Brussels prices we cannot attract investment to build new factories to create high volume unskilled employment. At this stage in the game we are not in competition with Brussels, but with Bratislava. That may not be a pleasant truth, but it is simply like that. We have attracted a large quantity of people here to work in unskilled low-value employment. The industry that gave them work just permanently disappeared out of sight. We need, urgently to find alternatives since we cannot pay them all 420 euros a month for ever. This is more than a simple academic exercise, it is now a question of life and death for the Spanish economy.

Basically we need to go back to 2000 wages and prices and start again. Maybe you don’t like this idea, but can you point me to anyone who has an alternative?"

Obviously, a huge cut in nominal wages is never going to fly in any country because wage prices are sticky. Call it “money illusion” or call it a desire to maintain a decent standard of living, across-the-board nominal wage cuts are a political non-starter. But, this is what is needed in Spain.

Edward does address the standard-of-living problem this presents:

This is not simply about bringing down wages. It is about simulating a devaluation by bringing down prices AND wages together. So you as an employee should be in the same situation as before. The only realistic way to do this is through a pact between employers, unions and political parties, everyone.

The only real problem is with the debts, since they will also need adjusting down, but see another thread here on this.

But OK, I’m not saying this is going to be easy, just that we have no alternative. We shouldn’t have inflated the housing bubble in the first place.

Of course, being able to devalue the currency is one way to achieve this. But, Spain does not have that option. These are the very real policy cul-de-sacs faced in the aftermath of a debt-fueled asset bubble. And since another one seems to be inflating right now, I reckon the U.S. and the U.K. will be joining Ireland and Spain on this dead-end street in due course whether their currencies are weak or not.

Related posts:

• European House Prices are slowing
• Spain and Ireland ‘thrown to the wolves’ after ECB move
• Spain intervenes to save Caja Castilla La Mancha
• UK real wages falling
• Spain gets deflation

This morning, I ran across a post by Prieur du Plessis, which linked out to a Stephen Roach interview on Charlie Rose.

Roach is the head of Morgan Stanley Asia and has been a voice to listen to when trying to discern where China is headed and how its relationship with the United States will develop. That was the topic of conversation between Roach and Rose. Through the links on that post I happened upon a 1996 Roach interview on Charlie Rose of a very different sort where he talked about the hollowing out of America and his concern for the future. I want to link those two below.

In the transcript of the recent China interview on Rose’s website, Roach marvels about the progress made in China:

CHARLIE ROSE: You left Wall Street to go live in China.

STEPHEN ROACH: I did. About three years ago, your friend and mine, John Mack, called me up and said, 25 years as an economist, a long time, good job. How would you like to do something different and be the chairman of Morgan Stanley’s business activities in Asia? And I told John I thought he was nuts. I had the best job. I wasn’t going to leave it. He said, "Think about it."

And, you know, John, when he says, "Think about it," there’s a fair amount of emphasis there. I did think about it. And I’d built fabulous relationships in Asia over the years, Charlie. I was passionate about the region. I thought I knew it well, but I knew in my gut that it would be a lot different from the inside than from the outside, and I said, yeah, I’m going to go for it.

And I’ve been out there now about two and a half years. And I have no regrets. I love it. I have learned an awful lot about Asia, and I thought it was time to put it down in a book and get it out there when the world is very focused on Asia, its own challenges and its role in the global economy.

CHARLIE ROSE: What do you love and what have you learned?

STEPHEN ROACH: What I am most passionate about in terms of Asia is what they’ve done, especially in China, over the last 30 years. You know, big celebration, 60th anniversary of the People’s Republic of China. But the first 30 years were pretty awful and the next 30 years have been spectacular. And the difference is they have really put huge focus on transitioning this economy from one that was owned by the state to one that is more of a market-based economy. They’ve taken huge risks in terms of reforms, layoffs, building market structures, building companies that we’ve never seen before. And to be on the inside and watching, watching that risk taking up close is a pretty fascinating experience for anyone. And I love every bit of it.

They go on to talk about the outlook there as well as how the government is dragging its heels on increasing domestic demand and shoring up a porous social safety net among other things. I definitely suggest you read the full transcript here. It makes for a better understanding of China. A snippet of the video is embedded below.

However, what was equally interesting to me was that Roach and Robert Reich were talking to Rose about concerns over the hollowing out of America’s workforce through downsizing (off-shoring had not yet gathered full steam).

Roach says:

“What has changed for me is my appreciation for what it has taken to get from point A to point B over the last ten years. It would be one thing if these productivity gains were built on the back of a more talented, skilled, educated, dynamic work force, but it’s another thing altogether if these productivity or efficiency changes were built on the basis of strategies that are hollowing out our companies, hollowing out our workforces, stagnating real wages – tactics in the end that can really lead to industrial extinction.

I’m sure you see the connection. If not, watch the video below in the context of the more recent video and your knowledge of what is happening in the global economy. I will say this: Roach was right about the dichotomy between the benefits to the owners of capital and the benefits to labor that these corporate strategies created.

Where I think his view could be tweaked looking back 13 years is in terms of what it has meant for Corporate America.  The hollowing out of America’s workforce and lack of investment domestically has not meant a hollowing out of Corporate America. Those companies that did downsize American workers in a ‘short-term’ play for next quarter’s earnings are many of the ones which have outperformed for the last 13 years because they have gone global. And the impressive leaps forward in China are testament to the gains made in places like China due in part to that move. It’s called ‘global labor arbitrage’ and it is what I see as the defining element of globalization as practiced.

In the end, however, a day of reckoning will come – not for the managers of the companies who have profited over the time span between these two interviews because they are going to keep their bonuses.  The day of reckoning for America will come in terms of the growth and dynamism of its middle class. Whether the U.S. then moves toward a Latin American style economic structure of a few rich at the top, a weaker middle class, and everyone else at the bottom or back to a more equal income and wealth distribution depends on the reaction by the ‘body politic,’ not on Wall Street.

Related posts:

• Stephen Roach: Downturn in Asia less severe, but recovery later
• Stephen Roach and Jim Grant: Video of credit crisis thoughts
• Stephen Roach is still bearish, no recovery until 2010
• Stephen Roach sees a W-shaped recovery for China
• Stephen Roach is talking double dip again

Marshall Auerback here with a few thoughts on employment policy and the limit to government spending in a fiat currency regime.

The Detroit story Edward just posted illustrates that we should start by eliminating the notion that society requires a buffer stock of unemployed people to discipline wage demands and protect profits.  Not only is this immoral and inhumane, but economically inefficient.  We can have both full employment and price stability via a Government as Employer of Last Resort.

This new class of government employees, which could be called supplementary, would function as an automatic stabilizer, the way unemployment currently does. A strong economy with rising labor costs would result in supplementary employees leaving their government jobs, as the private sector lures them with higher wages. (The government must allow this to happen, and not increases wages to compete.)

The reduction of government expenditures is a contractionary fiscal bias. If the economy slows, and workers are laid off from the private sector, they will immediately assume supplementary government employment. The resulting increase in government expenditures is an expansionary bias. As long as the government does not change the supplementary wage, it becomes the defining factor for the currency- the price around which free market prices in the private sector evolve.  It will also enhance the effectiveness of traditional policies designed to improve aggregate demand because it will create a buffer stock of EMPLOYED personnel for the private sector to draw upon, rather than a reserve army of unemployed.

There is no reason for President Obama and his economic advisors blithely to repeat truisms that “unemployment is a lagging indicator” as a means of justifying further government spending (the truisms you cite here should reflect the myths you’ve mentioned, not introduce entirely new ones).  The reality of a double digit unemployment rate is de facto proof that government spending is too restrictive.  His concern for the welfare of America and for the nation’s future is no doubt genuine. However, in the haste to renounce financing decisions which would, in fact, be very harmful if not impossible for a private business or a household, in their eagerness to accept uncritically the myths of neo-classical economics, the Obama Administration is overlooking the important differences between private finance and public finance. Only a misunderstanding of money and accounting prevents Americans from achieving a higher quality of life that is readily available.

Apropos money, we need to get over this notion that the government can’t “afford” something. Functionally, dollars have the same value to our government that Super Bowl tickets have for the stadium.

As you go into the stadium, you hand the man a ticket that was worth maybe $1000, and then he tears it up and throws it away. Why? Because the ticket has served its function: it has enabled you to gain entry to the event in question; similarly, a tax is paid to extinguish a state liability, but as soon as the tax is paid, it has no further value to the government. The tax receipt can be sent to the shredder. How does the govt taking your cash and throwing it in a shredder pay for anything?

The answer is that it doesn’t.

Taxes function to reduce aggregate demand, also known as spending power, and not to collect what the govt needs to spend on something else. As a matter of conceptual clarity, it makes no sense to say that a government ever “builds up a store of savings” that allows for higher spending capacity in the future. The govt neither has or doesn’t have any dollars.It spends by changing numbers upwards in our bank accounts.  Government is the score keeper for the monetary system.  Just like the stadium is the score keeper for the football game.

Awarding 6 points for a touchdown doesn’t use up some stock of points held by the stadium. We can always get another “3 points” each time a team kicks a field goal. We don’t have to “pay it back”.

You don’t “save” what you have the option of creating or not creating (i.e. fiat currency). Not spending, not “creating currency” via crediting bank accounts, simply means less present day economic output.

We all learned this as the paradox of thrift. There is nothing to “save” . The government is never revenue constrained. This is in contradistinction to the way users of the currency, vs. the issuer of a currency, such as a household functions. For them, spending is constrained by income. their checks will bounce if there is no money in their accounts. And for users of the currency monetary savings can be stored to permit higher consumption in the future.

Related posts:

• Unemployment claims stuck at 570,000
• Unemployment numbers still point to partial recovery
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• ADP report shows 371,000 jobs lost
• Rosenberg: U.S. unemployment rate headed for 12.0-13.0%

In July, I blogged on an interesting take on how employment affects equity returns during cyclical recoveries by Van Hoisington and Lacy Hunt. Their thesis was that a recovery in which employment lags the overall upturn significantly is bearish for stocks. Since then, employment has indeed lagged other economic indicators.  Witness the most recent employment situation summary released earlier today.

Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate (9.8 percent) continued to trend up, the U.S. Bureau of Labor Statistics reported today. The largest job losses were in construction, manufacturing, retail trade, and government.

Household Survey Data

Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent…

The civilian labor force participation rate declined by 0.3 percentage point in September to 65.2 percent. The employment-population ratio, at 58.8 percent, also declined over the month and has decreased by 3.9 percentage points since the recession began in December 2007.

Establishment Survey Data

Total nonfarm payroll employment declined by 263,000 in September. From May through September, job losses averaged 307,000 per month, compared with losses averaging 645,000 per month from November 2008 to April. Since the start of the recession in December 2007, payroll employment has fallen by 7.2 million.

In September, construction employment declined by 64,000. Monthly job losses averaged 66,000 from May through September, compared with an average of 117,000 per month from November to April. September job cuts were concentrated in the industry’s nonresidential components (-39,000) and in heavy construction (-12,000). Since December 2007, employment in construction has fallen by 1.5 million.

Employment in manufacturing fell by 51,000 in September. Over the past 3 months, job losses have averaged 53,000 per month, compared with an average monthly loss of 161,000 from October to June. Employment in manufacturing has contracted by 2.1 million since the onset of the recession.

In the service-providing sector, the number of jobs in retail trade fell by 39,000 in September. From April through September, retail employment has fallen by an average of 29,000 per month, compared with an average monthly loss of 68,000 for the prior 6-month period.

Government employment was down by 53,000 in September, with the largest decline occurring in the non-education component of local government (-24,000)…

In September, the average workweek for production and nonsupervisory workers on private nonfarm payrolls edged down by 0.1 hour to 33.0 hours. Both the manufacturing workweek and factory overtime decreased by 0.1 hour over the month, to 39.8 and 2.8 hours, respectively. (See table B-2.)

In September, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls edged up by 1 cent, or 0.1 percent, to $18.67. Over the past 12 months, average hourly earnings have risen by 2.5 percent, while average weekly earnings have risen by only 0.7 percent due to declines in the average workweek. (See table B-3.)

The change in total nonfarm payroll employment for July was revised from -276,000 to -304,000, and the change for August was revised from -216,000 to -201,000.

A few points here:

1. Losing over 250,000 jobs per month nearly two years into recession is an indication of a still weak employment market.  This is 400,000 jobs per month below where we want to be.
2. Why is the labor force participation rate still falling? This is a sign of a deteriorating, not improving labor market.
3. Manufacturing is still shedding workers even though industrial production is rising. That demonstrates a weakness whose source is record low capacity utilization.
4. Local and state governments are cutting workforce and countering the stimulus provided by the Federal Government as I indicated in January they would.
5. The workweek is a record low and this is crimping earnings power.

Conclusion: the labor market is till weak, weaker than it should be at this point in a cyclical recovery. Unless this changes in the fall and winter, a double dip recession is going to be more likely. While the preceding points stress the negative, I should point out that my baseline view is for job losses to continue to diminish, albeit at a slow pace. I would anticipate job gains to appear by the end of the year or early in 2010.

That gets me back to Hunt and Hoisington and partial recovery. Even if we see job gains by Q1 2010, this will be a full 6 months after the manufacturing sector turned up. This must limit consumption because spending can only increase through higher employment and income or increased debt and leverage. As most of the cost-cutting and productivity gains inherent in those cuts is now behind us, the heavy lifting begins. Earnings growth is likely to be weak in this environment.

How a fully priced equity and corporate bond market continues to rally in the face of these factors is beyond me. I see government bonds as a better bet than either corporates or equities for the medium-term.

Update: I failed to mention the rather large (over 800,000 jobs) benchmark revision of prior unemployment data.  It’s this sort of thing which makes people not trust the numbers.  But, revisions are always necessary if you are going to do month-to-month measurements in an economy as large as the United States. 

Here’s what the BLS said:

Preliminary Estimates of Benchmark Revisions to the Establishment Survey

In accordance with usual practice, the U.S. Bureau of Labor Statistics is announcing its preliminary estimates of the upcoming annual benchmark revision to the establishment survey employment series. The final benchmark revision will be issued on February 5, 2010, with the publication of the January 2010 Employment Situation news release.

Each year, the Current Employment Statistics (CES) survey employment estimates are benchmarked to comprehensive counts of employment for the month of March. These counts are derived from state unemployment insurance tax records that nearly all employers are required to file. For national CES employment series, the annual benchmark revisions over the last 10 years have averaged plus or minus two-tenths of one percent of total nonfarm employment. The preliminary estimate of the benchmark revision indicates a downward adjustment to March 2009 total nonfarm employment of 824,000 (0.6 percent).

Related posts:

• US Unemployment shows 5.5%, net loss of 62,000 jobs
• Unemployment rate climbs to 9.4%
• U.S. unemployment rate 7.2%, 524,000 jobs lost
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• 467,000 jobs lost in the U.S. in June 2009

This comes from the blog News from 1930:

An out-of-work broker asked a friend who owned a circus for work. His friend said the circus gorilla had recently died, and if the broker wanted to get into the gorilla’s skin, swing around, growl, and amuse the children, he could have the job. Things went well until one day the rope the “gorilla” was swinging on snapped and catapulted him into the lions cage. The lion let out a roar, which the “gorilla” answered with a timid yelp. The lion roared louder, and the “gorilla” lost his nerve and started screaming for help. The lion came closer and whispered “Shut up, you damned fool, you’re not the only broker out of a job.”

Related posts:

• News from 17 November 1930: “we face a winter of hunger and distress”
• WSJ Video: The End of Wall Street – Part One
• WSJ Video: The End of Wall Street – Part Two
• News from around the web: 2009-11-16
• Bear Stearns: Last 72 hours chronicled in new book

The U.S. economy lost 216,000 jobs in August according to figures released by the Department of Labor. This brought the unemployment rate up to 9.7% from 9.4% in July.  Despite the large rise in the headline unemployment rate (U-3), the figure for job losses was in line with expectations and dovetailed with the figures released by payroll company ADP on Wednesday. However, revisions to data from June and July increased the cumulative incremental job loss by 69,000 bring the actual net change to last month’s figures to –285,000.

Clearly, the labor market is still quite weak. Below are a few statistics on the overall trend:

• Figures looked weaker using the household survey. The number of unemployed persons based on the this survey increased a massive 466,000, while the number employed edged down by 392,000.
• The 12-month loss in seasonally-adjusted non-farm payrolls (NFP) is still increasing and is at a business cycle high of 5.8 million.
• The cumulative job loss since the business cycle peak NFP is 6.9 million
• Non-farm payrolls in the U.S. economy peaked during the business cycle ending February 2001 at 132.5 million.  A full 102 months later in August 2009, they were 131.2 million, 1.3 million lower. This is the weakest growth from the peak of one business cycle to the trough of the next since the Great Depression.
• Nevertheless, the 12-month change in the unemployment rate is now declining, which I have indicated in the past is a good sign of recession and recovery. In June, the increase was 3.9%. It was 3.6% in July and 3.5% in August.

Source

Employment Situation Summary – U.S. Bureau of Labor Statistics

Related posts:

• Comprehensive unemployment rate is 17.5%
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• A note on government statistics and unemployment
• 467,000 jobs lost in the U.S. in June 2009
• U.S. unemployment rate 7.2%, 524,000 jobs lost

Recently Allan Meltzer, a former Vice Chairman of the Federal Reserve, wrote a widely noted and provocative article in the Wall Street Journal called “What Happened to the ‘Depression?’” He called for an end to deficit-inducing stimulus because the cries of Depression from noted mainstream economists has been proven false.  His thesis is that these economists, most notably Paul Krugman and IMF Chief Economist Olivier Blanchard, are hyping the downturn to support a specific policy agenda with which he vehemently disagrees.

Conflating issues for ideological purposes

While his opinion piece deserves discussion, I find his argument disingenuous as he too is promoting a specific policy agenda.  The crux of the matter is three-fold:

1. How severe is this downturn and financial crisis?
2. How severe would it have been had specific policy measures not been taken?
3. Irrespective of the severity of the downturn, were these the right steps to have followed?

I delineate the argument as such because Meltzer, I believe purposely and misleadingly, conflates these issues for political purposes.  His goal is to present a narrative in which stimulus, especially deficit-inducing stimulus is seen as wasteful and misguided.  This may be the case (although I do believe certain types of stimulus are purposeful).  I don’t intend to examine that issue because it is as much political and ideological as it is economic.  It distracts from the real question: how severe could this downturn have been?

Nowhere near the Depression

When it comes to this core question, I agree wholeheartedly with Meltzer. This is not the Great Depression II, nor will it be, nor was it likely to have been.  I wrote a fairly personal post on this very point at the height of the panic last year called “Worse than the Great Depression.”  My point was that America, the world really, is much richer than it was in 1929.  The social safety net is much more robust. And policy makers are more knowledgeable than they were eight years ago. Comparisons to the Great Depression are misplaced.

But, Allan Meltzer is incorrect when he compares this downturn to 1973-75.  The present downturn is clearly more severe. The financial system has been hit very hard with a number of prominent institutions either dying (Lehman, Bear Stearns, Washington Mutual, Merrill Lynch and Wachovia) or being critically wounded (Citigroup and Bank of America).

When one looks globally, the same is also true.  Large or venerated institutions like RBS, Lloyds/HBOS, Hypo Real Estate, Dresdner/Commerzbank, Fortis, Dexia and UBS have all collapsed or been forced into the arms of government.  In 1974, we had a financial crisis that centered on the death of Herstatt in Germany and precipitated the first real modern crisis of financial contagion since Creditanstalt in 1931 (hence the term Herstatt risk and the reason for Bear Stearns’ bailout in 2008). But, this financial crisis was mild in comparison to what we have seen recently.

Employment is the difference

The real difference is the weakness of consumers, particularly in Anglo-Saxon countries and Spain.  Here, we see a mountain of debt, huge losses in wealth and a bevy of macroeconomic disequilibria without parallel – even in the Great Depression.

What’s more is this is indeed the worst period of employment growth in the U.S. since record keeping began during the Great Depression. Below is a chart showing the 100-month change in seasonally-adjusted non-farm payrolls.  This could generally be considered a length of time which spans an entire business cycle.  In April of 2009, we saw the first period during which non-farm payrolls decreased over a 100-month span.

What this data should make plain is that the downturn we are experiencing is really an outgrowth of the recession and jobless recovery of 2001-2003.  Only through the extraordinary efforts of Alan Greenspan in inflating a housing bubble to replace the telecom and technology bubble were we able to escape this downturn relatively unscathed.

Bubble economics has created a calamity

So, my conclusion is three-fold.

1. This is not the Great Depression II, but it is indeed a serious crisis – much more serious than 1973-75.  That makes this downturn more akin to the Great Depression than it does to other economic recessions in the post World War II period.
2. The downturn would have been greater had it not been for the policy response.  Policy makers have thrown everything they could at the problem – some would say too much! It is simply misleading to suggest that economic stimulus including fiscal stimulus has not pumped up the economy.  I would argue that we are about to see that not enough stimulus was provided to avoid a potential relapse – something I have been saying since before Obama came to office. It is this fact that has left the door open to claims like Meltzer’s.
3. I will leave it to the ideologues to debate the correct response. But if a 1937 outcome arrives, you will know why. I have said my piece about easy money; it was ineffective in bringing on sustainable recovery in 2001 and precipitated a more calamitous downturn.  I don’t think things will be different in 2009.  But, that leaves the question of budget-busting fiscal stimulus – the crux of Meltzer’s article.  There are some who think it better to swallow a bitter pill and let the downturn happen a-la Warren Harding in 1920-21 (see Wikipedia here and here). I have sympathy (as I suspect Meltzer does) for that view because of malinvestment that stimulus is likely to induce; Just look at China today. But I do think it is that sort of severe downturn which gave us Hitler and Mussolini and I worry about a 1937-style outcome.

There are no easy answers here.  Difficult policy choices must be made and the outcome based on these choices is far from clear.  However, Allan Meltzer is demagoguing this issue and not being straight about his ideological agenda.  It would be infinitely preferable if we could discuss this issue on the merits and not based on a fiction of ideology.

Related posts:

• Some tidbits about stimulus, recovery, and the Great Depression
• Unemployment: U-6 data versus the Great Depression
• The Great Depression II meme
• Bernanke expects recovery later this year
• Worse than the Great Depression

The Department of Labor reported that jobless claims in the latest week decreased 4,000 from a revised 574,000 in the previous week.  The figure was higher than analysts anticipated. Initially, the last week was reported as 570,000.

The 4-week average is now 571,250, marking the eighth consecutive week that initial claims for unemployment insurance have come in below 600,000. Initial claims are well below the peak levels from April, the decline being well within the norm for recessions over the past four decades.

However, this recession is not marked by an unprecedented surge in job loss. Job losses are not the problem.  It is the lack of hiring, which has made the downturn so punishing for the jobs market. Gross job losses are less important than net job losses – and net losses is where we are struggling.

The ADP report yesterday indicates we were down another 298,000 private sector jobs in August – this after 17 straight months of job losses. Expect a similar number when the Employment Situation numbers are released tomorrow morning.

But, the lacklustre employment market dates back to the previous recession and jobless recovery. Non-farm payrolls are now lower than they were when President Bush entered office over 8 years ago in January 2001. This record is much worse than any period since the Great Depression. (Below I have constructed a chart using all available data to show the 100-month change in non-farm payrolls since January 1939 when record-keeping began).

Conclusion: The employment market is weak and – absent asset price inflation – it will be a drag on the ability for consumers to spend for some time to come. Tim Geithner is correct that ending stimulus now would throw the economy back into recession. Depending on your economic philosophy this is either a necessary end to artificial economic support or a vital lifeline preventing untold economic harm.

Related posts:

• U.S. initial jobless claims fall 21,000 to 554,000
• U.S. unemployment claims rise sharply
• U.S. jobless claims foreshadow an ugly unemployment number
• Average unemployment claims up slightly
• US Jobless claims decline in latest week

If you recall, at the end of May, I wrote a post “Both initial claims and continuing claims now pointing to recovery” that said jobless claims data were pointing to an imminent recovery.  The general gist of my argument was recovery would come by year’s end or early in 2010. But we needed to focus on the shape that recovery would take. Although claims data suggested recovery was right around the corner, we should be sceptical as to how soon this recovery would come and how robust it would be due to the overhang of low savings and high debt – what Richard Koo calls a balance sheet recession.

That post generated a lot of negative commentary because it has become fashionable to be all bearish all the time in the econoblogosphere.  But, reality is almost never as extreme as some would have you believe.  In that vein, do re-read the jobless claims post. Three months on, it is looking a lot more on target than it might have done in May.

I mention this because James Hamilton over at Econbrowser has a nice post up called “It’s not over yet” which dovetails nicely with the themes in my May post. In May, I ended the post saying:

The real question is how robust a recovery are we going to have and this is directly related to why the jobless claims series has been sending a false signal.  Now, initial claims has been sending a recovery signal since January. Yet, continuing claims continued to rise more quickly until last week.  In the past, one had seen these two series as harbingers of imminent recovery.  But, I am talking Q4 here.  Why? Deleveraging.

In the end, consumers are going to be forced to reduce debt and save more in this more cautious financial environment.  Team Obama does seem intent on re-kindling animal spirits but the personal savings rate has gone up nonetheless.  This will be a drag on GDP growth going forward and means that the economy’s rebound will be more tenuous and slower to develop.  In my view, this means recovery will be delayed and once it gets going it will be weak.  The potential for a double dip is very high.

So, to be clear, first derivatives are starting to turn up and since recession is a first derivative event, we are probably going to see an end to this recession soon enough.  But, with structural problems still remaining, the U.S. economy will be weak for a long time to come.

And I still hold to those comments.  If anything, my comments were too bearish regarding when a technical recovery would take hold. Just yesterday, Hamilton made a similar argument:

Some are greeting Friday’s employment report as an all-clear signal. But my advice is, keep your helmet on– they’re still shooting real bullets out there.

Let’s start with the good news. I first called attention to the favorable turn in new claims for unemployment insurance on April 9, noting that in each of the previous 6 recessions, an economic recovery began within 8 weeks of the peak in new claims. On May 7, I concluded we had enough statistical evidence to predict with 85% confidence that new claims for unemployment insurance had indeed peaked at the beginning of April. Although there was some concern as to whether seasonal adjustment could be confounding the July readings, it’s pretty clear now that the substantial decline in new claims is the real deal.

And many cheered Friday’s BLS release showing that nonfarm payroll employment fell by 247,000 workers in July, the smallest drop since August, 2008. But the problem is, if a traditional economic recovery had actually begun in June (8 weeks after the April peak in claims), the number of people with jobs should have increased in July rather than fallen by another quarter million.

Hamilton goes on to say that he has done some figures on where employment numbers should be in comparison to previous peak in unemployment claims.  The chart below shows where he comes out:

Notice how much of an outlier to the negative 2009 data is. What does this mean? For Hamilton and a lot of other economists (Krugman, Roubini, and Stiglitz for example), it means just what I said in May – “we are probably going to see an end to this recession soon enough.  But, with structural problems still remaining, the U.S. economy will be weak for a long time to come.”

To my mind, the real question now is whether weak consumer demand couples with other lingering problem areas like commercial real estate to bring any technical recovery down before it starts. If we do experience a double dip, the second leg of the recession will likely be even worse than this leg.  Policy makers would be well-advised to address these problems here and now rather than waiting for them to take full form.

Related posts:

• Both initial claims and continuing claims now pointing to recovery
• Unemployment claims falling faster than in half of past recessions
• Jobless claims may signal the end is near
• U.S. employment data in line with estimates
• More thoughts on the fake recovery

The Employment Situation Summary for July was released today by the Bureau of Labor Statistics (BLS), showing a 9.4% unemployment rate and 247,000 jobs lost in July.  These numbers were better than anticipated, with the unemployment rate actually falling from 9.5%.

In its release, the BLS emphasized the fact that employment figures are improving. While the language is neutral, it should be clear to anyone that the BLS is trying to intimate that the economy is improving:

Nonfarm payroll employment continued to decline in July (-247,000), and the unemployment rate was little changed at 9.4 percent, the U.S. Bureau of Labor Statistics reported today. The average monthly job loss for May through July (-331,000) was about half the average decline for November through April (-645,000). In July, job losses continued in many of the major industry sectors.

Manufacturing lost 52,000 jobs, retail 44,000 and business services 38,000. Transportation lost 22,000 jobs, information 16,000, while financial services shed 13,000.  On the other hand, health care added 20,000 jobs, while the workweek increased to 33.1 hours from an all-time low of 33.0 hours in June. Workers earned 3 cents more per hour on average as well.

Translation: most industries are still losing workers, but at a slower pace.  Employment is still a weak link in the recovery chain.

Overall, this is a decent report given expectations. The glass half-full view would be that it shows we are well on our way to recovery. The glass half-empty view would be it shows employment is still a problem and could prevent a sustainable recovery.

As I have not had time to parse the data, I may have more to say later, time permitting. I know that Trimtabs had expected some heavy revisions but the headline number was much better than they had anticipated and more in line with Goldman’s revised more bullish outlook.

Related posts:

• US Unemployment shows 5.5%, net loss of 62,000 jobs
• U.S. unemployment rate 7.2%, 524,000 jobs lost
• Unemployment rate climbs to 9.4%
• U.S. loses 533,000 jobs, unemployment rate up to 6.7%
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.

US private employers shed 371,000 jobs according to figures released by ADP today.  Expectations had been for a loss of 350,000. As this report was released two days before the employment situation summary that gives us the unemployment rate and the government’s official estimates for non-farm payrolls, it is a good proxy for what to expect on Friday.

On the whole, economic data has been surprising to the upside, making third quarter GDP risks mostly upside risks.  The major exception here is consumer data: employment, personal income, and retail sales.  Here the data has been weak.

Obviously, as I have indicated in previous posts, a new normal baseline level of output cannot be achieved until the employment picture and personal income stabilize.  The ADP report indicates we are far from that point.  GDP can only show an increase in the interim due to inventory changes, government spending, or decreased savings and increased consumer debt.

Related posts:

• US personal income data for September shows pullback
• ADP Report: 697,000 jobs gone in February
• Personal income and recessions since 1929
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• Do the personal income data demonstrate unbalanced reflation?