Wizened by decades of deindustrialization and a slow acclamation to a declining standard of living, the American economy is once again finding itself staggering into recession, one that is certain to aggravate a country that, on many levels, had not even recovered from its last recession in 2001.
The great myth of recession, though, is that it is temporary. So goes the maxim, once the economy is out of recession, job growth will bounce right back. One time, this may have been true. But a closer examination should reveal that, now, the layoff spells of the so-called "business cycle" (a common misnomer) do not act as "furloughs." Suddenly, the word "recession" has found new meaning: that many who lose their jobs are permanently displaced. It doesn't sound nearly as benign as "business cycle", and there is a reason: recessions aren't benign by any measure. This is hardly any "sky is falling" stuff. As each economic cycle has passed since around the post-World War II period, the proportion of unemployed who remain so for at least several months has risen so that, as one expansion is about to end, a greater proportion of the unemployed are displaced for the long term than in the economic peak.
Specifically for the last two recessions (1991 and 2001) there is a reality that is not often observed, despite its crippling affects to millions of people. Unemployment is growing in America. This is not a recent trend that is only traced back to a few months ago, when the worst housing depression since the Great Depression finally received much needed attention. The government put unemployment for the final month of 2007 at 5.0%, much higher than the 4.3% rate that came at the start of the 2001 recession. However, an increasing proportion of the unemployed have been out off work for a long time. In both the 1991 and 2001 recessions, a new economic term was created: jobless recovery, when unemployment continues to rise well after the gross domestic product begins growing again.
A jobless recovery is the number of months since the official end of a recession that it takes for jobs to reach their pre-recession levels.
Looking at this graph, which is in logarithmic scale to better show job growth relative to the size of the economy, we see employment dip during 1991 and 2001 and then remain at their lows for at least another year after the recession.
UPDATE Begins Here
In terms of job growth, this translates to the worst economic expansion since the Great Depression.
UPDATE Ends
This was most pronounced after the 2001 recession, when the combined loss of 3 million between manufacturing workers and employees of the information technolocy sector did not result in a recovery. As I've been researching, I have read several stories on former employees of the technology sector when it was hot in the 1990s stating they have been unemployed for years. Worse, manufacturing did not perform even a modest recovery. For every year starting in 2001, there has been a net loss in the number of manufacturing jobs. This has accelerated since late 2006, and we are now on a 19-month losing streak. It is showing up in the chronically high unemployment rate of midwestern states.
Though economists claim that productivity has risen despite job losses, the social cost of this is that more and more people remain economically displaced.
"You have to understand that 5% unemployment today is worse than 5% unemployment 10-15 years ago," said Jason Furman, senior fellow, Brookings Institution.
Furman and others say long-term unemployment is not just a problem for those struggling to find jobs. It poses a risk for the economy as a whole and cuts into household earnings and economic output.
If 5% of the labor force is unemployed for a short time as they switch jobs, they could keep spending, drawing on a combination of government assistance and personal savings.
But those who are unemployed more than six months lose unemployment insurance benefits and are more likely to deplete savings to the point where they are forced to cut back on spending.
See article
So how bad is it? According to the government, it's pretty bad. As for anecdotal evidence, it's awful.
Six years after the 1982 recession ended, 10% of the unemployed were out of work for at least six months. Six years after the 1991 recession, this was up to 15%. Six years after the 2001 recession, this was at 19%, almost ten full percentage points higher than at the late 1980s economic peak. The pattern is stunning.
Going into 2008
What happened with regards to the ongoing housing bust? Consensus predicted a "soft landing", both in the economy and housing while assailing those who warned of a downturn. In fact, the consensus has still been pulling for positive employment growth. But we discovered from yesterday's awful employment report that 17,000 jobs were lost in January, compared with the 80,000 consensus (Wachovia predicted 160,000 new jobs.)
Wide talk of recession did not begin until this past summer. But the housing market's long downward spiral began in late 2005. The subprime markets collapsed in the spring of 2007. Now we're seeing this as a crisis that goes far beyond subprime, or residential mortgages, or even real estate as a whole. We're now seeing the first evidence of sharply rising credit card defaults, even among prominent companies like American Express, a most feared prediction. Each month seems to promise another twist.
Back in February 2007, Bob Pisani of CNBC spoke of real estate as a "bogeyman" and that those who were predicting a collapse of the housing bubble "didn't understand." In fact, he argued, a weakening real estate market comes from a weakening economy. See if you can figure who apparently "didn't understand" at the end of the day.
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Economic fundamentals and policy brought down real estate, not fear. The median household income fell 2.1% from 1999 to 2006. The only plausible way for many Americans to afford homes was to gamble the odds of foreclosure with adjustable rate mortgages. However, this was not so evident at the time. Lenders were eager to give loans, and part of this solution involved de-emphasizing the risks to those loans. Behind all this, however, the practice seemed legitimate. Homebuyers remained unaware. Fear's greatest (and perhaps only significant) contribution came at the end stages of a completed bubble bust. Larry Kudlow can declare that "borrowers lied" and that Wall Street is a group of angels until he is blue in the face, it doesn't change the fact that lenders understood the vast demographics of America, that many who applied for subprime mortgages were former renters, were low-income, and those same lenders failed to inform them of the risks associatated with the loans. Deregulation failed again. Though there were flippers who did lie and speculated on the market, lenders were the ones who crafted the hairbrained NINJA loans and other "no documentation" loans. Wall Street was ambitious enough to extrapolate those same mortgages, selling them in elaborate packages to investors who could then amass great wealth. Didn't they ask questions?
On a day-by-day basis a few months back, this was not easy to see, as many seem to only listen to day-by-day. It was observed that stock prices were going up, and this was attributed to "Bush Boom." Fast forward to January 22nd, 2008, and you will find Fox News' Neil Cavuto asking a very implicative question to his panelists: was the global stock sell-off because Hillary Clinton and John McCain were "frontrunners?" Given the ambiguity as to who was the "frontrunner" at the time in his/her respective party, one can only read this as code word for "economically more liberal than most Republicans." It's also a classic Fox News diversion from reality, which was that the entire world was fearing a U.S. recession would lead to recessions worldwide. The Washington Post recently published an article on many Canadians who are now unemployed because of the U.S. housing crisis leading to lower demand for construction materials. Japan is now feared to be in recession as well. European automakers are reporting tougher sales because Americans are not buying as many of their exports. Advocates of globalization should take notice.
The "soft landing" has all but died. Rising unemployment, vapid job growth, elevating default and bankruptcy rates (both individual and corporate), plunging stock prices: these are more like the makings of a recession. But more importantly, now that the most vitriolic advocates of "soft landing" (and, yes, one can still make the case for a soft landing, despite my disagreement) have tried to wage it as a "fearing oneself into recession." There was took much pessimism, they said. Too much pessimism? Take a look a the number of times "recession" was referenced in all news articles, editorials, and blogs. There was a meaningful jump this January, only after unemployment really took off.
But look at how static and relatively few stories there were prior to that. Even during those times, economic weakness was spreading. Job growth was weakening heading into, what appears to be, a first time ever "recession consensus."
Mainstream economists are taking notice, too, finally.
"We're at the start of a recession," said Mark Zandi, co- founder and chief economist of Moody's Economy.com in West Chester, Pennsylvania. "We expect a negative gross domestic product growth number in the first quarter."
Most Americans expected the economy would be in recession by late 2007. Ironically, it was these "analysts" subservient to their corporate employers who were wrong on the economy.
Others are in greater denial.
"It’s only one month," said Ethan Harris, chief United States economist at Lehman Brothers. "The first thing you learn as an economist is one month doesn’t make a trend."
Mr. Harris noted that a 17,000 job loss was "an incredibly tiny number" in the context of the overall labor market, which consists of about 130 million jobs. "It could be just a simple statistical quirk," he said.
Apparently, the past several months have made no impact on "analysts." Had the economy been producing 300,000 jobs a month this whole time and then suddenly drop by 17,000, Harris may have a valid point. However, any smooth downtrend, such as in employment, does not suddenly become a "quirk" when it goes negative. For greater than a year now, we have been observing less-than-stellar job gowth. That January's number came in negative is not surprising. This has been a very steady trend. In fact, the fact that unemployment rose so sharply in December leaves me to believe the BLS is greatly overstating December's revised 82,000 job growth. I feel this will eventually come in negative. Note that this graph is only for private payrolls. Neverthless, the original stats for December showed private payrolls dropping 13,000, the first time since 2003. January's came in at +1,000.
To wrap this up, America entered another recession. For a while, I've said it began around September, but I now feel this has been pushed slightly to November or December. That's not what is important, though. Economists will continue that debate well into the recession. The point is that millions of Americans will lose work this year, and there stands a great chance that about 1/3 of them will be out of work for several months. Also given the lack of direction for our economy, such as nurturing a growth engine for this century, we'll have our most vicious jobless recovery yet. I am certain the push for greener technologies will lead to the next economic boom. Until then, the human suffering will crescendo.