Risk has greatly increased this week. There are two reasons.
First, the Euro-bomb could explode anytime.
Second, the U.S. government dropped a bomb in telling us that the employment losses during the current recession are far worse than people had believed.
The Euro Bomb
The EU is in a lose-lose situation. If they rescue Greece, then other countries will have their hands out like Spain, Portugal, and Ireland. There could be others too. I doubt the main players (Germany and France) will have the stomach to bailout so many countries. The fundamental problem is that it is very difficult (near impossible) to have a currency union without a political union. While Euroland rules were established (size of deficit, government debt), they were (and are) routinely violated and there is no way to enforce – because of the lack of political union.
You create moral hazard problems. Countries will borrow and spend with the expectation that the system will bail them out. Sound familiar? If the large countries even marginally violate the rules (size of deficit, debt), then this energizes the smaller countries to brazenly violate the rules of the game.
If the EU does nothing, then the Euro will likely fall apart (or at least lose some member countries)
The real question is how deep Germany and France will want to reach into their pockets to keep the Euro going.
The Jobs Bomb
Unemployment dropped by 0.3% to 9.7%. Good news, right?
At the same time, the data were “revised”
We now know that at least 8.4 million jobs have been lost in this recession. Just last month, we thought it was 7.2 million. With the stroke of the Bureau of Labor Statistics’ pen, 1.2 million jobs vanished. Poof.
Let put this in perspective. The drawdown in people employed (non-farm payrolls) in this recession has been -6.11% (from December 2007, the month of the economic peak to today). In the 2001 recession, the drawdown was -1.21% (peak to trough). The 1990-1991 recession was only -1.13%. 1981 was more serious with a -3.08% drawdown. The recession of 1980 was only -1.07%.
Think of it this way. If we add up the employment losses over the past four recessions combined together, it sums to a -6.49% drawdown. We are dangerously close (-6.11%) to having this recession being as bad (in terms of jobs) as the previous four recessions!
Was there any good news?
Yes.
While the Establishment Survey suggested that nonfarm payrolls fell by 20,000, the unemployment rate is based on a different survey.
The Household Survey suggested fewer people were unemployed. That’s why the rate dropped. To be clear, the civilian labor force increased from 153.059 million to 153.170 million (denominator) and the unemployed decreased from 15.267 million to 14.837 million (numerator). Dividing the two numbers produces 9.687% unemployment.
There were many other small pieces of good news including: (i) greater participation rate (people re-entering labor force rose from 64.6 to 64.7); (ii) small increases in number of hours worked and average wage; and (iii) increase in temporary employment (which is usually a leading indicator of permanent employment growth).
The biggest good news is the trend. The employment situation is stabilizing.
My fears
- Usually, temp jobs are a leading indicator of growth in permanent jobs. This time might be different. Given the longer-term economic uncertainty, companies are satisfied rolling through temporary employees.
- We might see increased CAPEX without much employment growth. Companies are in the process of replacing and/or refurbishing their depleted capital equipment. Such expenditures may lead to labor savings. As such, it is unrealistic to think of hiring back all the laid off workers.
- The long duration of unemployment will lead to workers’ skills becoming stale. While companies have lots of job applicants, they might have fewer qualified applicants because of depreciated skills.
- There will not be enough growth to get us into the +300,000 monthly range for non-farm payrolls additions (we need +100,000 per month simply for population growth and 300,000 to get back all the current recession jobs lost in three years). This means that unemployment rate will be stuck at a very high level for a very long time.
- The continuing credit squeeze on small and medium sized business will defeat the recovery. Most of jobs are created by small and medium sized businesses and these firms are still severely constrained in getting credit.
- There is great economic uncertainty as a result of the extreme leverage in the U.S. economy. Corporations have reduced their leverage. Consumers have made considerable progress in increasing their savings. However, that is all offset by an exploding government debt. We are approximately at a situation where total (consumer, corporate and government) debt is 350% GDP. In the 1990s, it was about 250%. In the 1980s, 175%. In the 1950s, 60s and 70s about 150%. The previous peak was about 300% in 1933. Such a dark cloud on the horizon magnifies risk. Add to this the fear of increased taxes. Higher risk means less investment, slower employment growth, and upside prospects for the U.S. economy.
