Unemployment Tops 8%

The employment figures released this morning were awful. Here’s the press release from the Bureau of Labor Statistics: Employment Situation Summary

Since the recession began at the end of 2007 the economy has now shed about 4.4 million jobs. There seems to be no end yet to the worsening employment outlook. The number everyone follows closely is that for non-farm employment, farming being so erratic and now a quite small percentage of all workers, which fell by 651,000 in January after having fallen by a similar amount in December. The number of unemployed people has risen from 9.35 million in the third quarter last year to 12.467 million in January, while the figure of those who say they have dropped out of the workforce has also risen by about 1 million.

Overall there is nothing in this report that we can look on with any optimism. An 8.1% unemployment rate is still below the peak of the 1981/82 recession, but that provides no solace since both the downturn and then the recovery back then were fairly sharp. This time through, the economy seems to be following a more prolonged and inexorable downturn and the prospect is for a very slow recovery. The last expansion – since the mild 2001 recession – was the worst for job growth ever. So the platform we built, from which we are now falling, was weak to begin with. That weakness will prevent rapid growth when we finally turn the corner on this downturn because the imbalances we need to overcome are manifold rather than focused on just one area.

This lack of comparability is worth mentioning:

Some analysts are making comparisons between the current and the 1981/82 recessions in order to claim we are all over-reacting to this one and that the fiscal stimulus was unnecessary. This argument is particularly attractive to any right of center politician who objects to government spending. They look at the two unemployment numbers and conclude that 1981/82 was worse, yet the fiscal stimulus back then was minimal. The recovery for that recession was largely engineered by aggressive monetary policy via the reduction of interest rates.

This is where the comparison breaks down completely. The 1981/82 recession was artificial in that the Federal Reserve Board pushed rates up in order to slow the economy down. The reason was that it wanted to dampen inflation which was running in double digits at the time. As the recession bit and inflation expectations fell away the Fed then cut rates quickly so the economy could return to growth, only with the inflation problem removed. The success of monetary policy in 1982 has been used ever since as an argument against using fiscal policy. The problem now is that interest rates are already near zero. The Fed can’t slash them to get growth going. With monetary policy thus rendered ineffective, all we have is fiscal policy.

The irony, of course, is that the same people who want us to rely on monetary policy are the same ones who advocated low interest rates even in the face of the last two asset price bubbles. Had they supported running rates up in 2002/2006 the economy would have slowed back then and maybe even slipped into a mild recession, but at least the Fed would have had room to maneuver with monetary policy.

So: I think the employment picture will worsen throughout the year, although much of the severe damage due to ‘belt tightening’ in business will be over by the end of March. Beyond then the bad news will tend to come from business failures and bankruptcies rather than cutbacks in healthy companies. So as the summer comes on we will likely see a pattern of headline grabbing ‘chunky’ lay-offs rather than the systemic widespread losses that have fed the numbers over the past two quarters.

Look for a 10% + unemployment rate by year end, and no real improvement until mid 2010.