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The unemployment rate, now 10.2%, is just about as high as it's ever been since the Depression (see top chart). Job losses keep mounting, and so far it's another jobless recovery. In fact, jobs haven't grown at all for about 10 years. It's painful, and it's miserable. It's terribly unfortunate that the Obama administration dumped so much "stimulus" money down a black hole earlier this year, when cuts in marginal tax rates could have unleashed the power of the private sector instead of redistributing a trillion dollars from the haves to the have-nots.
But things could be a lot worse, as the second chart shows. That's the so-called "Misery Index" that was invented in the late 1970s to capture the dual problem back then of very high unemployment and very high inflation. Today we're fortunate that inflation is still relatively low. We worry that inflation might rise in the future, but for now that remains tomorrow's problem.
Most of the changes on the margin that I see are quite positive. Despite the lack of jobs, it is still the case that the pace of job losses is slowing. We're well past the worst part of the recession and in the early stages of a recovery. Financial markets have undergone tremendous healing. The private sector has already reorganized itself to become extremely productive: the productivity of the workforce surged at an 8.1% annual pace in the six months ended September, and productivity is likely still improving. Businesses are becoming more profitable. There is plenty of cash out there. Confidence is returning. The velocity of money is picking up. Global economic activity is rebounding. It is only a matter of time before we see net job gains. It still pays to be optimistic, but one needs to be patient.
15 comments:
Mr. Grannis:
Re: Your unemployment outlook.
Given the Published Unemployment Rate is 10.2%. Given with the Real Unemployment Rate, according to the Atlanta Federal Reserve, being north of 16%. Exactly what kind of dynamic demand is going to occur from this segment of idled works? In other words, the 84% employed can only create so much demand.
Its likely worth mentioning Unemployed Capital as this component doesn’t get much press time. Its also worth mentioning Private Capital Formation is strongly affected by rising taxes and the crowding out effect. That Private Capital Formation is a major component of Private Sector Job Creation
Productivity is clearly increasing but that is due to marginal labor being removed and the most productive labor remaining. Yes, many US Companies are profitable due to higher productivity and cost cutting.
Agree the Stimulus plan was the Spruce Goose of all stimulus plans ever concocted.
That leaves us with Final Demand being reset much lower, with no short or medium term drivers to increase Demand . Plus the current debt levels of the Public and Private Sectors is a drag on economic activity regarding Final Demand.
Just like stock market investor, expectations weigh heavy on Employers. With the increased costs of Socialized Medicine, increased cost associated with Cap and Trade, and rising local, state, and Federal Taxes, an Employer will hedge against new workers. That is to say, if demand increases the employer will merely increase the current average work week from 33.2 hours toward 40 hours. If demand continues to increase, the employer will put current workers onto overtime. If demand continues robust, then the employer has to weigh adding workers at the margin vs. all the new costs of Socialized Medicine, Cap and Trade, and rising taxes. The employer is likely to act slower and employ less given rising costs.
Labor is in big trouble. Big trouble for a long time. It would take somewhere near 30 straight quarters of 5% growth to reduce the Published Unemployment rate to 6.5%. However what is happening with the 16% Real Unemployed is that their Political Anger Factor is rising exponentially.
Scott,
Are you concerned that the Fed is creating an asset bubble and that there will be another crash soon?
Scott, thanks for your posts, as they keep us all thinking. However, I have very little confidence, $12+ trillion in debt, unemployment at 10%, but really it is 17.5%(if you revert to the pre-Clinton headline number, Table 12A, under BLS web site), and with no Economic Plan within the current administration, except more stimulus to re-distribute the wealth, extension of benefits, etc., etc., and what did the FED do on Wednesday, they voted to monetize the debt (keep rate 0-.025 for a long time). Where does this take us - -? I just don’t see a recovery - -or should I say a recovery in what?
The trend in your second graph looks like it is headed up and to the right to me...
Scott,
The Chicago Tirbune ran an article Nov 4, showing the total inaccuracy in the States numbers of jobs created in the school districts by the Obama admins' stimulus money http://www.chicagotribune.com/news/education/chi-education-stimulus-04-nov04,0,4659134.story
However, the following paragraph really put the future employment picture into prespective regarding the coming wave of more unemployed when the present stimulus money runs out:
"Just a handful of the jobs were new, Rafferty said, and he warned that every position propped up by stimulus money would be in jeopardy when the program expires. 'Unless there's a guarantee of continuation of (federal or state) money, the vast majority of these will be eliminated because there won't be local resources to fund them,' he said."
Mr. Grannis, what’s your opinion on the “Cap and Trade” legislation under consideration in Congress?
Is the current US administration the political equivalent of Reverend Jim Jones?
W.E.: You make a number of good and valid points. I would note that whatever the "real" unemployment rate is, the economy is doing better on the margin; whether the rate is 10% or 17% makes little difference, since it is a reality and is part of what makes the economy what it is today. Rising profits and worker productivity make it easier for businesses to expand in the future, even with all the headwinds coming from bad government policies.
I'm counting on the political anger factor to push Washington in a better direction. I think this is a very big deal. I see results already in the form of last week's elections.
Bill: I am concerned that there may be asset bubbles in the future, but right now I don't see any. The only valuation that I see that is possibly at extreme levels is the dollar, which is very close to an all-time low. But that is another way of saying that nondollar currencies are close to extreme highs. I don't think that is a meaningful conclusion, given that all currencies have fallen vis a vis gold. Gold is quite high, but still significantly below a level that might be considered extreme or bubbly. Treasury yields are quite low but still way above their extreme lows of late last year.
Scott and Fran: The $12 trillion debt figure you cite is misleading. That is the "total public debt outstanding," but that is a gross figure that includes $4.4 trillion that is held by government agencies (i.e., debt that the government owes to itself). The important number is the net federal debt that is held by the public, and that is $7.6 trillion. You can see the numbers here:
http://www.treasurydirect.gov/NP/BPDLogin?application=np
I agree that there are many potential problems, not the least of which is the fact that the Obama administration appears totally clueless about how to help the economy. The Fed, for its part, also appears to be amazingly unconcerned about the potential problems it could be creating by monetizing so much debt.
Bad policy choices have created huge problems for the economy to overcome, but I don't think they rule out a modest recovery. I've pointed out in previous posts that even many years of 3-4% growth would amount to by far the weakest post-war recovery we've ever seen. I'm not a starry-eyed optimist, I'm a realist and I try to be objective. Things could be a lot worse, and they could be a whole lot better.
In the end my relative optimism is driven by my belief that free markets (which are not totally free, unfortunately, but still mostly free) are self-correcting and efficient, and that the majority of the economic actors on the stage want to work hard and get ahead (i.e., self-interest is not dead). This adds up to a belief in the economy to overcome obstacles and grow, albeit slowly.
Public: there does indeed appear to be an upward trend in the second chart. It is being driven mainly be the change from a negative yoy CPI change to a positive change. It will most likely peak with the December release of the CPI, giving us a misery index high of 12-13%.
CDLIC: That is indeed one of the problems with using Keynesian "stimulus:" when the stimulus stops, the jobs stop. That's why the best stimulus is the kind that encourages the private sector to create new businesses and new jobs that are self-supporting.
So far, however, I don't think the number of jobs "created or saved" has been all that significant. Certainly the private sector has the ability to grow by enough to absorb some or all the stimulus-created jobs that might be lost in the future.
Louis: the cap and trade legislation is an abomination. I see nothing but waste, corruption, and inefficiencies here. I can't imagine it will have any meaningful impact on the environment. It is a showcase for how badly politicians can screw up the economy while appearing to pursue a noble cause.
Will it pass? Not for awhile, if ever. If it passes, will it kill the economy? No, but it will add to the headwinds the economy is facing, giving us more years of sub-par growth.
I agree with your assessment. In fact the numbers in total look quite good for the future. We have lost 5.5 million jobs in the last
year of which the last three months we have lost 576,000.In other words
the last three months (25% of the time) has constituted only 10% of the payroll jobs lost.If you look
at Table B-1 of the Establishment Data the the job losses in the last
three months are concentrated in basically four industries Construction,Durable Goods,Retail Trade,Leisure and Hospitality.These
industries make up 31% of the workforce but now constitute 86% of the joblosses in the last three
months.In other words 69% of the workforce is now experiencing virtually no job loss in the last three months.
The "misery index" was just another bubble that reflected the Carter administration's bad decisions. Bubbles are not necessarily just tied to prices. I believe that prices are the typical way we have monitored an underlying behavior, e.g. as buying stocks, homes, tulips. I prefer to look for spikes that suggest abberations. You had a downward spike in the market in March of 2009 caused by high volumes of selling that was preceded by a spike in prices caused buying behavior. Maybe I am wrong (and according to my spouse, that's a good bet) the new bubble is in spending and debt undertaken by the US Government. I believe the spike in debt issuance and spending will collapse, in one fashion or another, because they are unsustainable.
Therefore, the new misery index might be measured in unemployment+ the delta in the interest rate from a long term norm + total federal debt, per person (indexed to some fixed date).
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