Job losses over the past 6 months have exceeded anything we’ve experienced since World War II, and the number of long-term unemployed is at an all-time high.
Recent unemployment numbers have undermined confidence that we might be nearing the bottom of the recession. The appropriate metaphor is not the green shoots of new growth. It’s better to view the total of jobless people as a prudent navigator perceives an iceberg.
What we see on the surface is disconcerting enough. The Bureau of Labor Statistics estimate of 467,000 jobs lost in June increases to 7.2 million the number of unemployed since the start of the recession.
The cumulative job losses over the past six months have been greater than for any other half-year period since World War II, including demobilization. What’s more, the job losses are now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all employment growth from the previous business cycle.
That’s bad enough. But here are nine reasons we are in even more trouble than the 9.5% unemployment rate indicates:
1. June’s total included 185,000 people assumed to be at work but many of whom probably were not. The government could not identify them; it made an assumption about trends. But many of these mythical jobs are in industries such as finance that have absolutely no job creation. As official numbers are adjusted over the next several months, some of the 185,000 will likely be added to the unemployment totals.
2. More companies are asking employees to take unpaid leave. These people don’t count on the unemployment rolls.
3. At least 1.4 million people weren’t counted among the unemployed, even though they wanted work or were available in the past 12 months. Why? Because they hadn’t searched for work in the four weeks preceding the survey. The assumption is that they had found work or don’t want it, but there are other explanations: school attendance, family responsibilities, sheer exhaustion.
4. The number of workers taking part-time jobs because of the slack economy, a kind of stealth underemployment, has doubled in this recession to about 9 million, or 5.8% of the work force. Add those whose hours have been cut and the total of unemployed and underemployed rises to 16.5%, putting the number of involuntarily idle workers in the range of an overwhelming 25 million.
5. The inside numbers are just as bad. The average workweek for production and non-supervisory private-sector employees, around 80% of the work force, dropped to 33 hours. That’s 48 minutes a week less than before the recession began, the lowest level of activity since the government began tracking such data 45 years ago.
There are signs the recession may end in coming months, but recovery is likely to be so listless that many won’t feel the difference, says The Wall Street Journal’s David Wessel.
Full-time workers are being downgraded to part-time as businesses slash labor costs to remain above water. Factories operate at only 65% of capacity. If American workers were still putting in those extra 48 minutes a week, 3.3 million fewer employees could perform the same aggregate amount of work. With a longer workweek, the unemployment rate would reach 11.7%, not the official 9.5% (which in turn dramatically exceeds the 8% rate projected by the Obama administration).
6. The average length of official unemployment increased to 24.5 weeks. This is the longest term since the government started to track these data in 1948. The number of long-term unemployed (those out of a job for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
7. The average worker saw no wage gains in June, with average compensation running flat at an average of $18.53 an hour.
8. The jobs report is even uglier when you consider that the sector producing goods is losing the most jobs — 223,000 in the last report alone.
9. The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers to full-time status.
Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because more layoffs in this recession have been permanent and not temporary. Instead of shrinking operations, companies have closed whole business units or made sweeping structural changes in the way they conduct their business.
For example, General Motors and Chrysler shut down hundreds of dealerships and reduced brands; Citigroup (C, news, msgs) and Bank of America (BAC, news, msgs) cut tens of thousands of jobs and exited many parts of the world of finance.
In other words, we could face a very low upswing in terms of the creation of new jobs, and we may be facing a much higher level of joblessness on an ongoing basis. Job losses may last well into 2010, and unemployment may peak at close to 11%.
Can we find comfort in knowing that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power because employment reflects decisions taken earlier in the business cycle.
But today is different.
Unemployment doubled from 4.8% to 9.5% in just 16 months, a rate so fast it may influence future economic behaviors and outlooks.
Bear in mind that the lackluster increase in inventories suggests that there’s little prospect of real growth in consumption, investment or exports. So the terrible state of the labor market is likely to be a strong headwind against consumer spending as wages and overall income growth are decelerating.
And households soon will have received their full portion of the stimulus package. How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in spending that was supposed to yield $1.50 in growth for every dollar spent?
There are signs the recession may end in coming months, but recovery is likely to be so listless that many won’t feel the difference, says The Wall Street Journal’s David Wessel.
For a start, too much of the money went to transfer payments — Medicaid, jobless benefits and the like — that do nothing for jobs and growth. The spending that creates jobs is new spending, particularly on infrastructure. It amounts to less than 10% of the stimulus package today.
Second, while the stimulus package may have been well intentioned, it was too small and too badly constructed to get money into the economy fast enough to replace lost consumer and business spending and to slow unemployment.
Workers’ pessimism is justified: About 40% believe the recession will continue for another full year.
As paychecks shrink or disappear, consumers are more hesitant to spend and won’t lead the economy out of the doldrums quickly enough.
It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden told it as it is when he said the administration misread how bad the economy was. The administration inherited the problem but then failed to understand how ineffective its solution would be.
The program was supposed to be about jobs, jobs and jobs. It wasn’t. The recovery act included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases funds with typical inefficiency.
An additional $150 billion, allocated to state coffers so as to continue existing programs like Medicaid, did not add jobs. Hundreds of billions of dollars were set aside for tax cuts and for benefits for the poor and the unemployed, and that did not add jobs. Now, state budgets are drowning in red ink as jobless claims and Medicaid bills climb.
Next year, states will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending or raise taxes, or both.
The state and local government sector, comprising about 15% of the economy, is beginning the worst contraction in post-World War II history in the face of a deficit gap of $166 billion for fiscal 2010, according to the Center on Budget and Policy Priorities, and a cumulative gap of $350 billion in fiscal 2011.
Similarly, households overburdened with historic levels of debt will be saving more. The savings rate has already jumped from zero in 2007 to almost 7% of after-tax income and is rising. Every dollar of saving comes out of consumption.
Because consumer spending is the economy’s main driver, we are going to have a weak consumer sector, and many businesses simply won’t have the means or the need to hire employees.
In the aftermath of the 1990-1991 recession, Americans bought houses, cars and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won’t be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so.
In recent times, Americans found myriad ways to fuel spending, even as incomes stagnated, by borrowing against once-rising home values and tapping credit cards. No longer. The paycheck has returned as the primary source of spending, and pay is eroding even for those who have jobs.
This process is nowhere near complete, and, until it is, the economy will barely grow, if at all, and may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of the excessive debt has been completed.
There are signs the recession may end in coming months, but recovery is likely to be so listless that many won’t feel the difference, says The Wall Street Journal’s David Wessel.
Until then, the private economy will be deprived of adequate profits and cash flow, and businesses will not start to hire. Nor will they race to make capital expenditures when they have vast idle capacity.
In other words, there are many more reasons today to expect the downturn to continue than to expect a turnaround.
Consumer spending and residential investment could be even weaker than most estimates, and, as the level of fiscal stimulus starts to decline in the second half of 2010, we may be facing an even more difficult future.
No wonder poll after poll shows a steady erosion of confidence in the stimulus measures. One survey showed 45% believe the limited results suggest they should simply be abandoned midway. The disappointment is understandable, but that would only make things worse.
So what kind of second-act stimulus program should we look for? This time, it should not be an excuse to pass a lot of programs that don’t really have a multiplier effect on job creation and economic growth.
Given the trends, it is critical that the Obama administration not play politics but begin to prepare a second stimulus program to sidestep a major downturn. It will be possible this time to provide much more rapid government support to infrastructure spending that will maximize the creation of jobs.
The time to get ready is now.
