Tuesday, August 11, 2009
The mainstream news is citing the decline in unemployment from 9.5% to 9.4% in July as proof that the economy is stabilizing.
But is that true?
Distortions in the Numbers
Well, as the New York Times pointed out in July:
Include [those who have given up looking for a job and those part-time workers who want to be working full time] — as the Labor Department does when calculating its broadest measure of the job market — and the rate reached 23.5 percent in Oregon this spring, according to a New York Times analysis of state-by-state data. It was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.
And see this.
Indeed, as the Times notes in a third article, Americans are going to China to look for work.
In addition, economists and financial analysts point out that auto workers who would normally be laid off this time of year have been retained because of changes to the auto industry from the auto bailouts.
For example, PhD economist John Williams wrote on August 7th:
July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported, seasonally-adjusted monthly gain in July, up by 28,000 jobs.
Williams also said that certain distortions in unemployment figures are being caused by the severity of the financial crisis itself, but that - when these distortions subside in the months ahead - unemployment will increase. He also notes that official unemployment models tend to underestimate unemployment during recessions.
Indeed, if the aforementioned distortions are removed, Williams says that July unemployment figures would have actually increased slightly from June. Indeed, Williams says that accurate unemployment figures rose from 17.5% in December to 20.6% in July.
And Dave Rosenberg of Gluskin Sheff notes that tens of thousands of the new jobs in July were created by the government itself:
There have been large fluctuations in the federal government payroll too. After hiring a slew of Census workers in the spring, there were 57,000 layoffs in May-June and then we saw in today’s report that 12,000 federal workers were “hired” in July. Again, mathematically, this contributed about 20,000 to today’s headline number. In other words, and we have no intent on raining on anyone’s parade, there was about 100,000 non-recurring payrolls in that top-line figure. It may be dangerous to extrapolate today’s report into a view that we are about to fully turn the corner on the job market front.
Financial commentator Max Keiser says that unemployment is actually increasing and wages are falling. Keiser also says that the only sector in the U.S. which is actually strengthening is the military-industrial complex because of wars abroad. And see this.
And many economists point out that the length of time people are remaining unemployed is skyrocketing. As the Washington Post notes:
Another disturbing development was that the number of people out of work for 27 weeks or longer reached a record 5 million, accounting for a third of the unemployed. That suggests to some economists that those job losses were caused by structural changes in the economy and that many of those people won't be called back to work once the economy picks up. The longer people are out of work, the harder it becomes for them to find jobs and the more likely they are to exhaust savings or lose their homes to foreclosure.
No wonder even Paul Krugman writes:
That slight dip in the measured unemployment rate last month was probably a statistical fluke.Where Is Unemployment Going From Here?
Unemployment is a "lagging" indicator. In other words, if the economy crashes in one month, unemployment will not peak until several months or years later.
So we have to ask 2 questions:
1) How bad were conditions in 2008 and early 2009?
2) What will conditions be in the future?
A look back at how bad conditions were shows that they were probably worse than those at the beginning of the Great Depression.
Fed Chairman Bernanke and many other top economists (and see this).
Indeed, former Secretary of Labor Robert Reich wrote in April that the unemployment figures show that we are already in a depression.
And Chris Tilly - director of the Institute for Research on Labor and Employment at UCLA - points out that some populations, such as high school dropouts and African-Americans, are hit much harder than other populations. In other words, regardless of the population at large, these people are already experiencing depression-level unemployment. And see this and this.
Europe’s largest bank - RBS - warns:
Even if the economy starts to turn up the headwinds will be formidable,” [the company's CEO] warned. “The green shoots are short in duration and you need to be cautious about interpreting them. Even if growth returns, unemployment will rise for some time afterwards ...What Will Future Conditions Look Like?
When he was presented with the July unemployment numbers, even President Obama tempered his enthusiasm by saying that the official unemployment numbers will rise to 10% later this year.
And the Federal Reserve predicted in July that high unemployment will cause the eventual economic recovery to be drawn out and weak for years to come. In other words, the Fed is worried that we're trapped in a vicious cycle, where a poor economy will lead to high unemployment numbers, and unemployment will lead to less consumer spending which will worsen the economy.
Unemployment is always a lagging indicator, and given the record low number of average hours worked, it will turn around especially slowly this time. Until then, people will continue to lose their jobs and wages will remain flat, and any small rebound in housing prices is unlikely to help more than a few people refinance their way out of unaffordable mortgages. So unless the other part of the equation – monthly payments – changes, the number of foreclosures should just continue to rise.
Indeed, the Washington Post notes:
The country's growing unemployment is overtaking subprime mortgages as the main driver of foreclosures, according to bankers and economists, threatening to send even higher the number of borrowers who will lose their homes and making the foreclosure crisis far more complicated to unwind.
And see this.
Today, the Congressional Oversight Panel on the bailouts issued a report saying that small and medium sized banks are especially vulnerable, the report will say, in part they hold greater numbers of commercial real estate loans, "which pose a potential threat of high defaults."
Indeed, largely because of the commercial real estate crash, the FDIC expects 500 banks to fail in coming months.
The Congressional Oversight Panel report also says that banks remain threatened by billions of dollars of bad loans on their balance sheets, more could fail if the economy worsens, and that - if unemployment rises sharply or the commercial real estate market collapses – the banking system could again crash:
The financial system [still remains] vulnerable to the crisis conditions that [the bailout] was meant to fix...While the panel focuses on toxic loans, this holds true with toxic derivatives as well. As I have written in previous essays, the CDOs, CDS and other derivative side bets on the subprime and alt-a and commercial mortgages still haven't been reigned in, and they still have a high risk of bringing down the entire financial system unless they are either banned or brought to heel. The derivatives market is many times bigger than the world's real economy, and if that market crashes again, things could be bad, indeed.
Financial stability remains at risk if the underlying problem of toxic assets remains unresolved.
The government's entire strategy in dealing with the economic crisis was to try to artificially prop up the asset price of these toxic assets. Unfortunately, that strategy has failed miserably.
In an interview on Reuters Television, the chairman of the congressional oversight panel, Elizabeth Warren, said no one even knows the value of the toxic assets still on banks' books.
VALUE OF TOXIC ASSETS UNKNOWN
"No one has a good handle how much is out there," Warren said. "Here we are 10 months into this crisis...and we can't tell you what the dollar value is."
Estimates are that "somewhere between $600 billion and $1.5 trillion in toxic assets (is) spread across the balance sheets of the small and the large banks," Warren said, adding: "That's a lot."
Another trend arguing for higher unemployment is the fact that consumers have undergone a generational shift in spending habits, and will be frugal for a long time to come. Indeed, even if the financial crisis hadn't occured, long-term demographic trends would have pushed for frugality for many years to come.
Likewise, corporations are still hoarding cash.
Finally, there is excess capacity in many sectors. Excess capacity means there is no need to hire people to ramp up production. As the Washington Post notes :
With fewer people and businesses willing to buy things, it will take longer for the economy to work off all the excess capacity that was built up during boom times.
Think of thousands of idled factories, acres of empty strip malls and ports packed with unsold automobiles ...
So what does it all mean?
I passionately hope, of course, that economic conditions improve and that unemployment declines.
I hope that my assessments are proven overly pessimistic, and the economy recovers quickly.
But people forget that there was a huge rally after the initial 1929 crash, before the bigger second wave down of the Great Depression hit.
People forget that unemployment did not hit 25% until the fourth year of the Great Depression.
Former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff and University of Maryland Economics Professor Carmen Reinhart forecast in February that unemployment could reach 22% within 4 years.
So while I hope and pray that unemployment numbers get better, they could get much worse.