It’s still the Jobs Stupids!

Lining up for 'Hoover Stew' during the Great Depression

More economists are taking up their keyboards trying to tell folks why the Great Recession is different. More importantly, why recovery from the Great Recession will be different. Today’s analysis comes from Dr. Brad DeLong at Grasping Reality with both Hands and The Economic Populist. Let me just offer up the titles first. The Economic Populist says “We are So Screwed” and Delong announces “Fasten Your Seatbelts for the Jobless Recovery“. No one but the Obama economics team is whistling Prosperty is just around the Corner. So, grab that bowl of Dubya/Obama Stew and let’s delve even deeper into why the job markets really worry me.

Brad’s believes that the worst of things are over and that we may actually being seeing the ‘trough’ or low point of the The Great Recession right about now. However, he’s not ready to sing “Happy Days are Here Again” primarily because he sees a jobless recovery along the lines of what we saw during Dubya’s first term only more aggravated. Remember the post 9/11 recovery that only felt like a recovery to the very rich while the rest of us saw our incomes stagnate so we had to finance our day-to-day things by borrowing and de-saving? DeLong’s crystal ball sees that kind of recovery without our ability to borrow or sell off over-priced assets. He believes we may have stalled the freefall, but we are in no way positioned for dynamic growth because we’re not going to have any spare income to spend even if we’re lucky enough to have a job.

It is likely to be a recovery. The central tendency forecast right now is that real GDP contracted at a rate of 1% per year or less between the first and second quarters of 2009, and will grow between the second and third quarters at a rate of 2% per year or so. When the NBER Business Cycle Dating Committee gets around to it, it is most likely to call the end of the recession for June 2009, second most likely to call it’s end in April, and a recession-end date later than June 2009 is a less likely possibility. One reason that we are likely to see a recovery starting… right now… is the stimulus package. It probably boosted the real GDP annual growth rate relative to what otherwise would have been the case by about 1.0 percentage point in the second quarter, and is going to boost the annual GDP growth by about 2.0 percentage points between now and the summer of 2010–after which its effects tail off.

But it will not feel much like a recovery. After the 1982 recession the turnaround in employment lagged the turnaround in GDP by only six months. Thereafter employment growth was very strong: in the eighteen months up until the end of 1984, growth in work hours averaged 4.8% per year. it took only 7 months after the 1982 recession trough for the employment-to-population ratio to rise above its trough level (1980: 2 months. 1975: 5 months. 1970: 18 months. 1961: 13 months. 1958: 4 months. 1954: 8 months.) By contrast, it took 29 months after the 1991 recession trough for the employment-to-population ratio to exceed its trough level, and 55 months after the 2001 recession trough for the employment-to-population ratio to do so. Productivity growth in the immediate aftermath of the end of the 1991 and 2001 recessions was surprisingly rapid: rapid enough to eat up all of real demand growth and more as businesses decided to take advantage of the economic downturn to slim down their labor forces and become more efficient.

Today–unless we get much faster real GDP growth than currently looks to be in the cards–we are headed for a jobless recovery. The answer to the economic question–was the stimulus sufficient to rapidly return the economy to something like normal unemployment?–is likely to be: “h— no, it was much too small…”

Economic Populist breaks the job markets and the unemployment figures into a much more dismal scenario. Their thread argues that the current way we seasonally adjust unemployment figures is damn near criminally misleading. This is because of some very fundamental changes going on in the economy some of which we’ve talked about before.

Brad also mentions this when he discusses “Okun’s Law” which is the economists’ rule of thumb for how much economic growth it takes to make the unemployment rate move. This relationship, studied by Okun during the Kennedy years, appears to be changing. This is important to know because it basically looks now like any stimulus package based on the assumption of Okun’s Law will be terrifically undergunned for the current job which again is what we’ve been saying. The Obama stimulus is not going to produce the kind of jobs they’ve promised. This is not your daddy’s recession.

Right now, we have 15 states and the District of Colombia that have unemployment rates of over 10%. Six states have rates between 9% and 10%. This shows a substantially weakened economy. Besides this, again, we have a decade of growth and compounding to replace to get back to square one. We can’t treat this like we’re still living in the Truman/Eisenhower/Kennedy years.

Throughout most of the country, the initial claims figure covers less than half of the unemployed. It only gives half the story, literally, and as the recession drags on people are increasingly using up all their unemployment benefits, and still without a job. By the end of the year something like 100,000 people will be in this position if current trends continue.

All the things I’ve brought up suggest that we should be suspicious of the initial claims number as a measure of unemployment, and that things are still pretty bad out there. It’s a problem because these models create expectations, and when those expectations are wrong, the response when the truth comes out is shock and awe. Things go awry, and have an outsized impact, lowering consumer confidence and further hurting the economy. And on top of all this, two very big black swans are getting ready to kiss.

There are those silly black swans again! Remember we’ve talked about them before. Remember, White House, CNBC, and Goldman Sachs propaganda suggests that the economy is starting to get better. What this ignores is the potential of black swans which would be some “potentially catastrophic combinations of economic events on the horizon”.

The first Black Swan on our event horizon is something we discussed yesterday. That black swan is the bankruptcy of CIT and the potential impact it could have on small businesses. It has the potential to be the next Lehman Brothers because of the role it plays in factoring receivables. Many small businesses sell of their future incoming accounts receivables to financial institutions like CIT at a discount to get the money now. They want the money now because they want to restock. Many little franchised mom and pop stores like Dunkin’ Donughts, Ace Hardwares, and Baskin Robbins Ice Cream stores rely on factoring. The Gap and Kmart rely on it too. This is especially important since retailers can’t get inventory loans right now from those TARP hoarding banks that aren’t lending. Right now, the government is betting CIT will not be the next Lehman. I’m not. I’m happy to see I’m not the only one with this concern. This is when retailers gear up for the Winter Holidays. What if you go Christmas shopping with your meager funds and there’s nothing to buy? What will another bad holiday season mean for the retail sector? (I don’t think you need me to explain that.)

The second Black Swan is the commercial real estate market which is considered to be in really bad shape right now.

The $3.5 trillion commercial real estate market is a ticking “time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.

About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and “doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This “looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.

The response by banks to this “growing threat has been slow and inadequate,” said James Helsel, a partner at RSR Realtors in Harrisburg, Pennsylvania, and treasurer for the National Association of Realtors. “The lack of liquidity and banks’ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.”

There were 5,315 commercial properties in default, foreclosure or bankruptcy at the end of June, more than twice the number at the end of last year, with hotels and retail among the most “problematic,’ Real Capital Analytics Inc. said in a report yesterday. Losses on commercial mortgage-backed securities, or CMBS, will total 9 percent to 12 percent of the market, or as much as $90 billion, said Richard Parkus, a research analyst for Deutsche Bank Securities in New York.

We’re right back to those systemic problems that neither Geithner or Summers want to take on with their regulatory reform. You want to know why? Remember Credit Default Swaps? They’re out there on these properties just like they were out there on the subprime loans and all those packaged prime loans. Yup, we still haven’t dealt with the root of the financial crisis. This is the bottom line from The Economic Populist.

In other words if there has to be a rescue, we are likely going to see large banks based in New York swallowing up local and regional banks across the country at fire sale prices. And the concentration of financial power in this country will continue apace.

It’s not the CIT situation or commercial real estate alone that can do the real damage, but together the situation is made worse.

A CIT bankruptcy could lead to spiraling retail closures, creating large numbers of distressed commercial properties. Banks would have to hold on even tighter to cash to stay solvent in this environment, meaning less money lent. Less money lent means retail and production companies have less ability to ride out the recession through deficit financing. Which means even more commercial real estate goes vacant. And so on, and so on, until a horrible amount of damage has been done.

This has the smell of a real Black Swan, and it comes at a time when people (falsely) believe that things are finally improving.

Thankfully for me, there’s not prohibition at the moment. The more I delve into the fundamentals, the more I need my favorite summer drink of Gin & Tonic plus a little jazz. Sister, can you spare a job?