Awful jobs report but temper the pessimism
Reasons to temper pessimism, but not to delay action in America
IF BARACK OBAMA grows tired of being president, he might have a future trading bonds. On Thursday January 8th he predicted that data would show that America had lost more jobs in 2008 than at any time since the second world war. An official report published on Friday confirmed precisely that. Non-farm payrolls plunged by 524,000 in December from November, and the picture was made darker by downward revisions of 154,000 to the previous two months. That brought the loss of jobs since the recession officially began in December 2007 to 2.6m, the largest 12-month drop in absolute terms since the aftermath of the war.
The unemployment rate has jumped from 6.8% to 7.2%, a 16-year high, far above economists’ already dire predictions. It is up from a low of 4.4% in early 2007. Throw in discouraged workers who have given up looking for work and those working part time who would prefer full-time work, and the “under-utilised” employment rate is 13.5%, up from a little over 8% in early 2008.
It is easy to begin fearing that not only will this be the worst recession since the Great Depression, it may be another depression. Yet two reasons exist to temper the pessimism. First, while the magnitude of job loss represents a lot of misery, the American labour force is some two-and-a-half times larger than it was right after the war. The 1.9% drop in employment last year was smaller than the 2.7% 12-month declines recorded at the depths of the 1974-75 and 1981-82 recessions. As a new database from the Federal Reserve Bank of Minneapolis helpfully shows, (see Free Exchange), the percentage decline so far in this recession is exactly equal to the median decline at this stage of the ten post-war recessions.
Whether this remains a median-scale slump depends on what happens next, and the prognosis remains grim. David Greenlaw, an economist at Morgan Stanley, predicts that job losses will continue on the scale of the past few months until around April. “There was a very significant and unusual turn in the economy in September-October when…credit markets were most tight. The consumer stopped buying cars, planned for a weaker Christmas, companies stopped ordering and started looking where they wanted to cut employment…we are in for several more months of this kind of deterioration in overall economic activity.” He sees the unemployment rate reaching 9.5% by the end of the year.
Another reason to temper pessimism is that the earliest leading indicators, which are in the financial markets, have turned up. Stockmarkets bottomed in November and have since trudged higher, although they fell after Friday’s employment report. Spreads on corporate debt have narrowed since then, and on interbank loans even more so. To be sure, that is in large part thanks to the extension of federal guarantees to much of the financial system, but that demonstrates how rescue measures are getting some traction. Mortgage rates have tumbled on the purchases by the Treasury and the Fed of mortgage-backed securities (MBS), so waves of refinancing, which boosts consumer cash flow, and a rise in home sales, are not far off. “On the margin I’m less bearish on the economic outlook,” says Nancy Lazar, an economist at ISI, an investment group. Her favourite indicator is the broad money supply, which has grown at around a 20% annual rate in the past three months.
Pessimists would note that the Federal Reserve, having cut its short-term interest rate to zero (in effect), is out of conventional ammunition. It is using tools such as open-market purchases of MBS whose stimulative effect is far less certain. But that uncertainty may be symmetric: the impact of these unconventional policy instruments may be larger or smaller than is commonly thought. There is no useful history by which to judge.
All that said, being less bearish is not the same as bullish. Ms Lazar notes that employment fell for more than two years in the past two cycles, and there is no reason to expect differently this time, even if output stops contracting by the end of this year.
More important, the rally in the financial markets in great part reflects anticipation of aggressive action to be taken by Mr Obama, such as $775 billion in fiscal stimulus, and the Federal Reserve, such as Treasury bond purchases. If they do not deliver, those gains may easily be unwound. “The situation is dire, it is deteriorating, and it demands urgent and dramatic action,” Mr Obama said after the release of Friday’s data. That is not just a political talking point: a gimlet-eyed bond trader would say the same.