Ugly Unemployment Numbers

Put this into the category of bad news. Since everyone, well nearly everyone, was predicting a drop, the news that unemployment rose last month is a shocker. August’s payroll loss was revised down to 201,000, and September’s came in at 263,000. The consensus had been that we would see something in the order of 165,000. So not only was the actual number worse than expected, but it was much worse.

To put this in context: September’s loss was the 21st straight month of job losses which is unparalleled since the Great Depression. Plus the unemployment rate now stands at 9.8% which is the worst for 26 years.

Every subset of the data is poor. We have lost about 7.6 million jobs during the recession; the total of unemployed people has mushroomed to 15.1 million; long term unemployment has exploded and is now at 5.4 million; and 35.6% of all unemployed people have been without a job for 27 weeks or longer.This is ugly news indeed.

If we add in discouraged workers to the unemployed the figure of people looking for work and unable to find it bloats up to 17.0%. There is no way to spin that figure in a positive way.

Simply put: we should be seeing some improvement by now. That we are not suggests a much deeper weakness than the third quarter GDP figures will show when we see them on October 29th.

The ramifications are obvious: the recovery will depend upon our ability to get demand rising. That means people have to go out and spend. Once that happens the recovery can become self-sustaining in a virtuous cycle of spending being the cause of re-hiring, which leads to wage growth and more spending.

Instead of this virtuous cycle we are stuck in the opposite. That leads me to be concerned about the sustainability of the recovery. Without more jobs there is no way that the economy can keep growing. Today’s news casts a long and unexpected shadow over the outlook for such growth.

Put another way: once the one time impact of the current inventory adjustment has been absorbed, and once the administration’s stimulus plan has started to fade, the economy private sector will have to stand on its own feet. At the moment it seems not to have enough confidence to be able to do that.

That implies that the likelihood of another recession sometime next year is now rising.

I have talked about this before: as businesses examine their own forecasts of what sales they expect next year and in 2011, they will invest or hire workers accordingly. To the extent those forecasts are diminished by limited or pessimistic sales expectations businesses will act to defend their profits by staying ‘lean’ and avoiding adding expenses. They may even cut further. The result is that the poor forecasts end up becoming self-fulfilled.

This is a case of fear driving us deeper into a hole.

All this would be entirely rational too. That’s what makes it so frustrating. By everyone being sensible and acting to defend their self-interest, the economy as a whole continues to shrink and everyone ends up worse off.

This is a classic paradox of thrift.

And is ended only by Keynesian style expansionary fiscal policy.

We may need another stimulus to break the cycle of fear.

The problem with that is the political situation.

The Republicans have already touted today’s numbers as ‘proof’ that the stimulus didn’t work. This is from a group that has no alternative policy and was opposed to the stimulus anyway. In fact one of the reason’s that the stimulus has taken a while to bite is that the administration caved into Republican demands and added too much of a tax cut component to the stimulus. I have beaten that horse to death over the past few months, but it bears repeating: tax cuts are awful stimulants. People who are scared about losing their jobs tend to save, and not spend, any cash they get by way of a tax cut. So by diverting stimulus money into tax cuts the Republicans managed to neuter the stimulus to a large degree. If the stimulus didn’t work – and it is working so their attacks are vapid and irrelevant – it would have been their fault anyway.

Nonetheless Republicans being what they are, they will kick up a huge stink if we have to ask for more stimulus. Their opposition puts the recovery at risk. So hopefully we won’t need to go that route.

Unfortunately today’s unemployment data suggests it will be touch and go though.

Let’s hope September is an aberration, rather than the onset of a new downward trend.