September 05, 2003

Fear of Bad Employment Reports

This morning's employment report reduces Doug Henwood to a state of gibbering terror:

Doug Henwood: This morning's U.S. employment report sucked. The survey of employers showed a loss of 93,000 jobs, when flat to slightly up was a reasonable expectation. We've now had seven consecutive months of job loss, something we've never seen outside a recession. The workweek was short and almost every industrial sector shed jobs. The survey of households showed a shrinkage in the labor force - the entire reason for the decline in unemployment from 6.2% to 6.1%. The share of the adult population working was flat, and remains at a low for this cycle. People are buying stuff, but it's not with their paychecks - it's all tax refunds and mortgage refinancing. If the job market doesn't recover soon, we're in trouble.

What Doug fears is that sometime soon households will change their states of mind: they will think that the risk of losing and then being without a job, or being unable to find anything other than a crappy job, is too high; and thus that they need to cut back on their spending significantly in order to build up their buffer stocks of savings as a way of insuring themselves against being ground into mush by the gears of the lousy job market.

If households' states of mind do shift in that direction, then we are in real, real trouble. The Bush Administration is incompetent at countercyclical policy. The Federal Reserve is out of ammunition, and cannot do much more to stimulate spending.

A decade ago Larry Summers (and I) opined that it was probably not wise to try to get the inflation rate below 4% per year or so, because with a 4% inflation rate you could push real interest rates down to -4% per year, and give a very powerful incentive to everyone to borrow and spend. With our current 1.5% inflation rate the biggest incentive boost the Fed could possibly give is less than half as great.

I really wish we didn't look so smart in retrospect...

Posted by DeLong at September 5, 2003 09:41 AM | TrackBack

Comments

http://jobwatch.org/

Continued high unemployment has affected those who have remained employed by depressing wage growth. Comparing wages in the first half of 2003 to those a year earlier shows that the growth of hourly wages has fallen behind inflation across the boardódown 0.7%, 0.1%, and 1.0%, respectively, for low-, middle-, and high-wage workers.

Since the recession began 29 months ago in March 2001, 3.3 million private sector jobs have disappeared, a 2.9% contraction. This is the largest sustained loss of jobs since the Great Depression. Since the official end of the recession in November 2001, there has been a 1.3 million loss in private sector jobs, a 1.1% contraction.

Posted by: anne on September 5, 2003 10:22 AM

What we are looking at are structural changes in the employment scene:

Yes, payroll numbers, unemployment and joblessness are lagging indicators. It's a well known understood process: As companies start to feel more confident about economic prospects, they do the following:

1) Improve productivity, wringing out maximum output from each employee;
2) Recall idled (temporarily laid off) employees;
3) Have workers put in overtime, working later nights and weekends;
4) Hire temp workers. This pool of labor are administratively cheaper to manage, and much easier to fire -- its a temporary position after all.
5) Higher new full time employees.

But there lags, and then there are LAGS, and presently, we are doing more than lagging

We are now reflecting a major secular change in the labor markets. These have been (mostly) ignored by the powers that be in both Washington D.C. and on Wall Street up til now.

Posted by: Barry Ritholtz on September 5, 2003 10:33 AM

Let's just stipulate that the Bush team is clueless. Is it just possible that even thinking economists are clueless as well? That nobody has a good idea about how to handle a new phenomenon -- a perpetually accellerating productivity growth rate?

Posted by: joe on September 5, 2003 10:36 AM

We can happily spur employment. We could have had an infrastructure building program with federal funds that would have been a prime stimulator of employment. We chose tax cuts focused on the rich who do not need to spend the proceeds. We could have had fine fiscal policy. We have awful fiscal policy and the fierce deficits to prove it for years to come.

Posted by: anne on September 5, 2003 10:57 AM

Barry Ritholtz said:
"As companies start to feel more confident about economic prospects, they do the following:

1) Improve productivity, wringing out maximum output from each employee;
2) Recall idled (temporarily laid off) employees;
3) Have workers put in overtime, working later nights and weekends;
4) Hire temp workers. This pool of labor are administratively cheaper to manage, and much easier to fire -- its a temporary position after all.
5) Higher new full time employees."

Or they instead of going to step 5, they lay off their temp workers after a year so they're not subject to a lawsuit. They they go back to steps 1 & 2. My husband is a temp lead QA technician working 50-60 hours/week in the SF East Bay. In December he'll either be laid off or hired on. But the company knows that nobody else is hiring permanent employees, so there's no competition. Why bother ever hiring anyone permanently ever again?

Anne - WE did not choose tax cuts. That *expletive* in the White House did.

Posted by: Theresa in Oakland CA on September 5, 2003 11:08 AM

Gibbering, yes. The entire drop in the jobless rate was due to households reporting a 147,000 rise in employment. The 10,000 decline in the workforce cannot account for a 0.1% drop in the jobless rate. The question of whether people are buying stuff with their paychecks or cash-outs or home equity is not evident merely from looking at the level of refinancing. The nature of refinancing must also be known. Cash-outs are down this year from last years pace, or at least were at mid-year. That means people are paying for more the increase in goods they are buying with their pay checks, less with cash-outs, this year because they are paying smaller mortgage payments. With mortgage payments reduced, a higher level of consumption is possible henceforward. I agree the job market stinks, but let's get our facts straight.

Posted by: K Harris on September 5, 2003 11:08 AM

There are no clear answers yet to the question of how consumers are financing spending this past year. Private saving, however, appears to be slowly falling from a low level to lower. Household debt levels may well be holding back spending. Still, if household spending can not be expected to climb significantly we are left dependent on a federal spending to spur demand or a period of structural change in the corporate world that will slowly slowly result in job creation.

Waiting for structural change can be waiting for Godot. That was why the Japanese chose infrastrcuture spending to maintain employment these past years.

Posted by: anne on September 5, 2003 11:31 AM

Anecdotally, I personally have cut back consumption in a big way in response to a period of unemployment and utter poverty last year, even though I'm out of it now. But a lot of people that I know are in the same situation now and they just don't seem to be reacting the same way.

I think they just don't want to admit that they're not middle-class anymore, if they ever were. I don't think they will admit it unless they are absolutely forced to.

Posted by: rps on September 5, 2003 11:51 AM

rps

Interesting anecdote.
Thanks.

JD

Posted by: jd on September 5, 2003 12:03 PM

I may be just a simple caveman, but isn't inflation an easy thing to drive up? Can't the government just print money?

Posted by: Hari on September 5, 2003 01:03 PM

Brad wrote: "What Doug fears is that sometime soon households will change their states of mind: they will think that the risk of losing and then being without a job, or being unable to find anything other than a crappy job, is too high; and thus that they need to cut back on their spending significantly in order to build up their buffer stocks of savings as a way of insuring themselves against being ground into mush by the gears of the lousy job market."

Very succinct analysis of one of Keynes key insights, as I understand it.

And yeah, and what's going to cause it to happen, I suspect, is the impending housing market collapse. That's the third leg of the three legs keeping the economy up and when it goes the second leg (consumer spending) will go - leaving only government spending.

And if that happens what you've seen so far is nothing compared to the destruction and desolation we'll see then.

Ian (economic doomsayer)

Posted by: Ian Welsh on September 6, 2003 08:13 AM
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