Unemployment and Recovery

The BLS reported this morning that in April the U3 unemployment rate increased to 8.9%. This is a .4% increase from March, and is what I expected.

This is one of those cases where "less awful" actually ought to give rise to some hope. Before Black September, when we had a shallow recession confined to Wall Street and housing-related trades, the worst month for payroll loss was -175,000. By November the loss was -597,000, and from December through March losses were clustered near -700,000 a month!.

April's payroll loss of -539,000 is ~140,000 less than the last 4 months. If this new trend continues for another 3 months, payroll losses will vanish and the economy might actually begin to add jobs by August.

Way back at the beginning of this year, in my conclusion to looking at Economic Indicators of the Roaring Twenties and the Great Depression, I wrote that under an optimistic scenario, the Recession might bottom and a Recovery begin in about July. Nearly all of the reports since then have comported with the optimistic scenario (real residential investment being the exception). It now looks very likely that the Recession will indeed bottom imminently.

I hasten to point out that the economic situation for average Americans will continue to stink. But it will stink more like April 1933 than Febraury 1933 -- in other words, the trend will be up not down. I also suspect this will be another "jobless recovery" where the unemployment rate continues to climb over 10% and stays there for several years. And I am also very worried that the fundamental problems in the American economy have been elided and that a "W" shaped recession a la 1979-82 may be in store, where a brief recovery gives way to an even deeper Recession Act II in a year or two.



But is this a typical recession?

I agree with your last point. This recession caused in large part by the financial sector has some very dangerous and unique characteristics.

It seems that all the negatives or drags on the economy will be magnified and offset any gains or positives.

It's not a typical recession

But it is remarkable just how many indicators, including indicators that hold true for the Great Depression era, are aligning with the scenario that the recession bottoms in the next couple of months.

It's not a recession. It's a depression

I can't fathom how you can compare this to the Great Depression, and still come to the conclusion that it is already coming to an end.
We have a structurally deficient economy and nothing has been fixed.

As for the unemployment numbers, you ignored several important ones. For instance, the average duration of unemployment jumped this month from 21.2 weeks to 23.4 weeks.

This is reflected in the overall unemployment number. What I refer to is that the labor force shrank by nearly 500,000 last month.

But as usual, the laugher is the Birth/Death model, which added 226,000 fictional jobs.

It's a "Great Recession"

You and I aren't as far apart as it may seem. The Bailout/Stimulus Fed packages all have failed to address the underlying problem in the American economy, of strapped consumers and an obese financial sector. Until that is addressed, I do not expect the secular bear market - and the economic problems that underlay it - that started in 2000 to end. We are just coming to the bottom of the second in a series of at least 3 stairstep declines that probably won't end for another 5 or even 10 years.

The first stairstep was the dotcom recession of 2001. Consumers never really recovered from that and ran up debt based on the housing ATM (thank you Alan Greenspan). We had an economic recovery -- GDP was positive throughout -- but consumer confidence, correctly, never recovered.

When the housing ATM blew up in 2006, we started the second decline, that went into recession at the end of 2007. The inverted yield curve in the bond market foretold that about a year earlier (and was as usual denied, only to be proven right).

I'm just going by historically accurate leading economic indicators -- yield curve, stock market, money supply growth, ISM manufacturing, a peak in new jobless claims, and a probably bottom in CPI deflation -- in saying that the second stairstep decline appears to be ending.

As to the average duration of unemployment and shrinking labor force, I would need to be convined based on past history that these are leading economic indicators. If anything they are probably lagging indicators, though.

As to the birth/death model, it's been adding probably 100,000+ phantom jobs for a couple of years now. Since my analysis is on the direction and rate of change, a bias which is consistent like the B/D model doesn't significantly have an impact. If the model added 200k phantom jobs in Dec., Jan., Feb., Mar., and Apr., then a 160k decrease is still a 160k decrease.

As I say, it is remarkable just how many leading indicators are suggesting that the bottom of this recession is upon us. It could of course be a false dawn, but the likelihood is, it is real.

We agree emphatically that "We have a structurally deficient economy and nothing has been fixed." For that reason although I expect +GDP growth later this year, it will be anemic and fragile. Should for example the price of Oil go back up over $80/barrel, we could be knocked right back into recession. More generally, should inflation raise it's ugly head again, the Fed will be in a hell of a spot.

And of course, the average American is now significantly worse off in their finances than the average American was a decade ago. Boomers' retirement funds are still impaired, housing prices haven't bottomed, there's still too much consumer debt, Wall Street hasn't been reformed and still has all of the same perverse incentives. So we may be coming up on the upturn in the middle of a "W" shaped recession, where the second part of the recession will be worse than the first.

In the meantime, to the extent a "Depression" refers to unemployment in excess of 10%, I expect us to arrive there shortly even in U3 terms, and to stay there for several years.

I can't say from the data as it exists now what might knock us down stairstep number 3. But I believe it lurks out there in perhaps 12-24 months. Maybe 48 months if we are lucky. That stairstep will take us down even further. That we have racked up several $Trillion in new debt, and given the largesse to Wall Street fatcats only makes it worse. We will have probably run out of maneuvering room.

We may differ in what the next 3-9 months will bring, but ultimately I think we agree on the long term situation.

But Trapdoor Day is comming

15.9% of our GDP is State Government employment/spending.

On July 1st, most of the states in the union (40/50) will be hitting the end of their fiscal year- and since foreclosed homes rarely keep up on their property taxes and unemployed people buy less (cutting into sales tax) and earn less (cutting into income tax), we're going to see a huge crunch of state budgets- resulting in massive layoffs of government employees.

I say for once, New Deal, you've missed a *BIG* crash coming up that will derail employment gains completely, and might yet trigger that wage-price deflationary spiral we're all so worried about hitting.

And will very likely cause us to have negative GDP by year's end.
Executive compensation is inversely proportional to morality and ethics.

Executive compensation is inversely proportional to morality and ethics.

Maximum jobs, not maximum profits.

About sales/income/state taxes

That's true in all recessions, including a couple of major ones like 1973-74 and 1981-82. So you need to figure out why "it's different this time."

I know a lot of people think there is a huge spike of more foreclosures out there waiting, but I'm not sure the "second wave of resets" hasn't been transformed by refinancings already in place into a 6 inch tsunami.

I expect it to be exactly the same

I don't expect it to be different. Last recession Oregon lost teachers, state police officers, fire departments, and libraries statewide, as well as being lampooned in Doonesbury for losing days.

The only real difference I see is that this makes a bad situation worse- state governments are always the last to fall in the GDP scheme, but fall they do, and this time, we've got massive unemployment to begin with.

I'm not sure about the second spike of foreclosures, but I *am* sure about massive state government layoffs coming for anything *not* affected by federal stimulus money- and it's not very easy to retrain a teacher who is used to sitting behind a desk to shovel asphalt.

Executive compensation is inversely proportional to morality and ethics.

Maximum jobs, not maximum profits.

About that "second spike of foreclosures"

Calculated Risk has a very informative post shedding light on the second wave of foreclosures that are supposed to be coming.

There are two separate issues involved. There are "resets" and "recasts". CR cites a post by the late lamented Tanta who helpfully explained: "'Reset' refers to a rate change. 'Recast' refers to a payment change."

The difference is important, because mortgage rates are at multigenertional lows. In other words: 'resets' problably won't be an issue, as those rates may be reset far lower than originally believed.

'Recasts' will be the problem, if there is one. As CR says, "Resets are not a huge problem with low interest rates, but recasts could be significant."

With mortgage rates pushed to multigenerational lows by the Fed, there has been a wave of refinancings in the last few months. Many of the recasts may also have gone away in that process.

You aren't describing an end to a recession

You are describing a bear market rally. Clearly that is already happening, but it isn't an end to this economic downturn.
If you look at things like the stock market, this has all the classic symptoms of a bear market rally.

As for unemployment numbers, it's worth noting that the U3 didn't exist in the 1930's. It was under the Kennedy Administration that the concept of "discouraged workers" was first invented.

As for unemployment being a lagging indicator, that is traditionally true...for recessions. We aren't in a recession. Every downturn since WWII has been led by Federal Reserve interest rates. Not this time. Not since the GD has the banking system led the collapse of the economy.
I normally avoid the phrase "this time is different", but I'm going to use it this time.

Bear market rally vs. end of recession

What would you accept as the difference between a bear market rally and an end to the recession?

For example, the S&P doubled from 2002 to 2007, but never surpassed its 2000 high in real terms. Was that a bear market rally or real?

If we have positive prints for GDP in the 3rd and 4th quarter, but GDP is still below its 2007 high, is that a bear market rally or a weak recovery?

BTW, on unemployment in the 1930s, it appears that a few sources have been able to put monthly numbers together, but I haven't found them publicly available. I once again ran across an article suggesting that the traditional 1930s unemployment rates we discuss are much closer to U3 than U6 FWIW.

If you want a prediction

I say that this rally will be over by summer.
Timing isn't my strong suit. I get it right no more than 50% of the time. But I'm telling you right now not to trust this phony bear market rally. Don't go long in the stock market, and don't trust the bond market either.
The system is broken, and a broken system cannot have a bull market. Or, as Jim Willie puts it:

Financial market anchors and analysts debate whether the 30% stock rally qualifies as the new bull market, as nutty green shoots are identified. The supposed green shoots are nothing more than elaborate moss on exposed decaying roots of dead standing trees. These are sprawling sequoias with hollow trunks and decayed roots. Those sell-side optimists ignore that a 30% stock market rise after a 50% decline since October 2007 is a typical bear market correction. The green shoots cannot possibly be new attempts at legitimate growth when jobs are being destroyed on a massive scale, home foreclosures continue to rage, home values continue to decline closer to 20% than 10%, corporations are guiding lower on profits and investments, and the states are cratering financially. Besides, the S&P500 Price Earnings Ratios are at historic highs, not lows. Worse, the earnings are mostly fictions. Votes are being registered in the gold & silver markets, and in the USDollar and USTreasury Bond markets.

Just wanted to clarify

if we were mainly arguing semantics.

So, I'll put it in more objective terms. Recent data persuades me that it is far more likely than 50/50 that there will be positive GDP numbers for Q3 and Q4 2009.

I would call that a recovery, although it will probably be a very tepid one. You may consider that a bear market rally. But at that point, the disagreement is only semantics.

Two different solutions

The idea of labeling this a "Great Recession" is a laugher.

While the effects of a recession and depression are similar only by varying degrees. The actual ways of solving them are drastically different.

In most recent decades we have experienced recessions of varying degress but all were addressed in the same Keynesian way by juicing the money supply and deficit spending. This time is no different as their approach is still the same way of addressing the slow down in the economy .

What we have this time is too much debt. You cannot print money and lower already zero interest rates and wash out bad debt. The only solution to a depression is the depression itself... the debt has to be cleansed out of the system.

Unemployment is still rising, even at a temporary slower rate , we still lost -600K jobs. Thats a negative! Not a "less bad positive".

All of that so called stimulous is hyper inflationary and the results are being seen on Wall Street. Once again government mistake thinking that a rising stock market is good for Main Street.

What happens NDD when the punch bowl is taken away? When the stimulous money stops flowing? We have already seen what happened when the FED started raising rates in 2004. It took nearly two years in .25% steps but eventually they created the crash.

We cannot go on forever spending money we do not have and zero interest rates that our foreign creditors control. This will end soon, it will end badly, and it will end before the Obama administrations first term.

I *really* wish you weren't right

but I fear you are.

And the social effects will be Obama as a 1 term president, blamed for the misstep, and the beginnings of a three-way civil war in the United States by 2012 (as urbanites invade the countryside for food, rural militias defend their farms, and it becomes unsafe for bankers or politicians to leave their east coast enclaves of New York and Washington DC).
Executive compensation is inversely proportional to morality and ethics.

Maximum jobs, not maximum profits.

I received some e-mails from people on the east and west

coasts. Their questions were this. Will it be a revolution or civil war?

If things keep getting worse I would wager on civil war.

Not ready to make that call

While it would be healthy for America

The tree of liberty must be refreshed from
time to time with the blood of patriots and tyrants.
~Thomas Jefferson

I think you need to see a lot more people with a lot more time on their hands.

It has always been about class warfare.

I expect to see 20% unemployment in Oregon

By the end of the year, EVEN WITH THE STIMULUS MONEY.
If Obama fails to the extent above, there will be plenty of people with a lot more time on their hands by the end of his only term.
Executive compensation is inversely proportional to morality and ethics.

Maximum jobs, not maximum profits.

When we lost ~100,000 jobs a month

during the peaks of the 1980s and 1990s economies, was that a negative too?

If we drop to 400k job losses this month, and 100k job losses by Labor Day, would you still call that a negative?

Yes it was

Losing jobs is always a negative. That's why the Kennedy Admin came up with the Discouraged Workers theory to create U3 and cut back on the number of people in the workplace.

Having said that- I can see us dropping to 400k jobs lost this month, 300k next month- but between July 1 and Labor Day, I expect us to lose another 1-1.5 million jobs from state budgets resetting alone. Oh, it'll only be 50,000 in one state, 150,000 in another, but it'll add up. A lot of people will be getting pink slips, quite a few more will find themselves with reduced hours. A lagging indicator, of course- recessions hitting government always lags by 6 months to 2 years depending on the state- but we'll see those jobs go poof.

Executive compensation is inversely proportional to morality and ethics.

Maximum jobs, not maximum profits.

Did you just have a duh moment?

Was it right after you read what you wrote? ;o)

Come on NDD, I've been reading you over at the KOS for awhile and you know better than that.

YES! Losing a job is always negative. The early 80's and 90's were recessions and losing a lot greater than 100K. But .......when you are losing them at a faster rate than being replaced even 400K is significant.

It is when the unemployment occurs is the business cycle. In normal markets there is always a certain amount of frictional unemployment.
In a recession, cyclical unemployment is VVB (very, very, bad). When you are adding 100K a month to the ranks of unemployed .... m-o-m .... would you call it "less bad?"

It has always been about class warfare.

My point was

in response to yours, that the recession couldn't be bottoming because "400k job losses is a negative."

Of course job losses in any amount, even in booms, stink. But your context was that job losses negative the end of a recession. So I was calling your attention to the fact that job losses always occur.

I'll add to that

Not only did no one recover from the 2001 recession in reality...

but it just so happens this is when full scale global labor arbitrage started in earnest. That's when these offshore outsourcing "peddlers" started having "conventions" inviting CEOs who then went back to their companies and demanded jobs be offshore outsourced as fast as possible.

It's also the time frame when the China PNTR kicked in. It came into effect in 2000 and we had manufacturing, as fast as they could, pack up their bags and move their plants to China.

Now, and this gets no damn press and I have tried writing about it....we have two things going on in the same motif:

1. higher education. They lowered (literally) the international accreditations so someone with a 2 yr degree literally, if they do it right, can be accepted into a US PhD program, all the while squeezing out U.S. citizens from higher education/training.

2. offshore outsourcing/insourcing (manipulation of immigration systems) of advanced R&D, advanced, the highest skill level jobs. Now this is particularly bad because not only are these jobs require lifelong career, education, training, but in addition to being the top jobs...they also create the jobs of the future and the innovation of the future for major economic sectors.

I'll ignore the unskilled labor issue which is a topic unto itself but they are so intense on labor arbitraging the middle class with the above methods and you cannot get any policy change! You can get lip service and even minor things, like the corporate tax code, loophole that enables MNCs to manipulate domestic markets to increase their total global revenues/decrease the total global tax bill...that alone will not "do it", but the corporate lobbyists still, over any change, any minor anything....swarm the hill like killer bees. They control the government, hence we cannot get through the real changes needed to stop this race to the bottom global hemorrhage.

Duration of unemployment

Duration of unemployment is clearly a lagging indicator. Go to the St. Louis Fred site and type in UEMPMED.

If the recession bottoms now or in the next few months, if past patterns hold, the duration of unemployment will continue to rise, perhaps for another year or two.

We talked before about a PS index

And I'd have to say anybody losing their job, in a time of rising duration of unemployment, is certainly in the Personally Screwed Index.

I realize it's a lagging indicator- but if we do end up slipping into a wage-price deflationary spiral, then there is no reason for hope until wages stop deflating.
Executive compensation is inversely proportional to morality and ethics.

Maximum jobs, not maximum profits.

What if people knew about the

birth/death mathematics used my the Gov. Would they start to leave their Matrix like life?

jobless recovery

That's still a lot of jobs, over half a million and the long term unemployed are coming.

Also, does anyone have a real tally of the jobs "created" by the Stimulus.

So far I only know of 22k jobs created....in India.