The losses are staggering. If the pace of January and February continued through the year, we would lose 8.4 million jobs in 2009.
That is unlikely, but it will be ugly. Consider the following facts.
The percentage job losses have now exceeded the deep 1981 recession. Since December 2007, we have lost 3.17% of nonfarm jobs. In 1981, we lost 3.07%. But we are not done yet.
The recent survey by Duke University and CFO Magazine had CFOs cutting 5.7% of their workforce in 2009. Further, they see the recession lasting another 14 months.
Let’s do some calculations. There are 111 million private sector jobs. 5.7% layoffs means 6.3 million jobs lost in the private sector.
Currently, the labor force is 154 million and there are 12.5 million unemployed, implying an unemployment rate of 8.1%.
Now suppose the CFOs are correct and we lose another 6.3 million jobs and the unemployed rise to 18.8 million (12.5+6.3). That implies an unemployment rate of 12.2%.
So you think the CFOs are pessimistic? Well, maybe they are. But we are forgetting something. We are measuring “planned” workforce reductions. This number does not include the layoffs that result from firms going out of business. Hence, there is reason to believe the number could be greater than 6.3 million.
Wait, we have forgotton the “stimulus” plan. In the most optimistic (and unrealistic) projection, 3 million jobs are created. This means (only) 15.8 million unemployed and a rate of 10.2%. In my opinion, it is more realistic to think that 1.5 million new jobs are created by the plan. This leaves us with 11.2% unemployment.
There is a serious disconnect here.
The Obama economic team’s analysis of the stimulus plan had unemployment capping out at 8% (with the plan). We have already blown through 8%.
More seriously, the so called “stress test” assumes a worst case scenario of average 8.9% unemployment in 2009. That is not a worst case. That is not even a realistic projection. We could hit 8.9% in the next two months! Oddly, the “baseline” scenario, also has 8.9% unemployment in 2009. What kind of scenario analysis has identical projections for “baseline” and “severe”?
Unfortunately, the news gets worse. Unemployment lags the business cycle. This means that even if there is a recovery in the economy in 2010 unemployment will likely continue to increase. The stress test worst case had unemployment increasing 1.4 points in 2010.
The recent data suggest: (1) the situation is much more severe than our policy makers are letting on and (2) the stress test exercise for our financial institutions will have little value because of the unrealistic assumptions about the economy in 2009.
Given the trillions that we are shelling out, I think we deserve transparency and straight talk. It is better to tell us how bad it really is than to sugar-coat some economic projections that will surely lead to future disappointments — and decreased confidence.