Saturday, December 06, 2008

More job losses expected

I don't know what else can be said on yesterday's 533,000 job loss in November. This MSNBC story provides a few more interesting statistics, and the economists' stunned reaction to the huge job loss:

Friday’s report showing the biggest monthly job loss in 34 years confirmed forecasters' worst fears that the decline in the U.S. economy accelerated in November, after the financial system seized up and consumers hunkered down. As the government scrambles to break the downward spiral, some economists are predicting the unemployment rate is headed substantially higher through next year.

Since the start of the recession in December 2007, the economy has lost 1.9 million jobs, lifting the number of Americans out of work to 2.7 million. At 6.7 percent, the jobless rate has now risen 2.3 percentage points since it bottomed in March 2007.

Graph showing monthly U.S. jobs lost for 2008. From MSNBC News.

Most sectors of the economy are now losing jobs, including manufacturing, construction, financial firms, retailers, and the leisure and hospitality industries. Only government, education and health services managed to post job gains.

Friday’s report also slashed another 200,000 jobs from the numbers already reported for September and October — a sign that the economy was hit harder than first reported when the credit crunch deepened.

Economists, who had been expecting a loss of some 350,000 jobs last month, were stunned by the news, describing the report as “horrendous,” "horrific" and “eye-poppingly bad.”

“We’re scrambling around here for historical parallels,” said Robert Barbera, chief economist at ITG, an investment advisory firm.

I do not think there is a historic parallel to what the U.S. economy is now experiencing, and that probably includes the Great Depression. There are huge, structural problems within the U.S. economy--the housing collapse and the subprime mortgage meltdown, the non-existent credit market, the huge amount of foreclosed homes that banks have on their books--with more on the way, the Wall Street meltdown in CDOs and other investment securities based on home mortgages, the huge amount of both government and personal debt that Americans have accumulated,the ongoing wars in Iraq and Afghanistan that are adding even more debt to the U.S. government. It is almost like the U.S. economy was a car that slammed into a brick wall at 75 miles an hour--there is not much left to see except wreaked steel, plastic, and the bodies of displaced American workers. Naroff Economic Advisors president Joel Naroff calls the latest job numbers, "shocking," saying that "Companies are sharply reacting to the economy's problems and slashing costs. They are not trying to ride it out."

And it is only going to get worst. Going back to the MSNBC story:

What makes the latest data so worrisome is that they point to an economic decline that is picking up speed.

“The economy is now locked in a vicious downward spiral in which employment, incomes and spending are collapsing together,” said Nigel Gault, chief U.S. economist at IHS Global insight.

Consumers also are taking a hit to their finances as the collapse in housing prices and the rise in foreclosures that tipped the economy into recession show no signs of abating.

American consumers are saddled with debt. First there is the subprime mortgage debt that Americans took on during the housing boom. With the housing crash, one in 10 Americans have a mortgage that is either in foreclosure, or at least a month behind on their payments at the end of September, resulting in a record 1.35 million homes in foreclosure for the third quarter. The percentage of auto loans that fell behind by 60 days or more rose to 15.9 percent in the third quarter, according to the credit reporting agency TransUnion. American families carry an average credit card debt of around $8,000. Americans are drowning in debt. And this has forced the lenders to tighten the credit market:

As consumers struggle to keep up with existing debts, lenders have cut credit card limits and tightened up on extending new loans, which has further crimped spending. The collapse of the stock market has wiped out trillions of dollars of personal wealth, forcing consumers to try to increase savings to make up for those losses.

All of which is accelerating the pullback in consumer spending – the main engine of the U.S. economy that accounts for roughly two-thirds of gross domestic product. Consumption dropped 3.7 percent in the third quarter; the spending pullback is expected to worsen during the holiday season that retailers rely on for the bulk of their profits. Gault expects consumer spending to shrink by 4.7 percent in the fourth quarter.

Economists already have begun comparing the current downturn to the back-to-back recessions of 1980-1982. The unemployment rate peaked at 10.8 percent then after the government pushed interest rates to high double-digits to try to break a decadelong inflationary spiral.

“You had interest rates that soared, the credit system shut down, and everything stopped,” said Barbera. “That's what this (jobs) number says, and that's what it suggests for the GDP numbers."

Before Friday’s jobs data, economists had expected GDP to contract at a sharp 4 to 5 percent rate in the current fourth quarter. Barbera said the latest data indicated the drop could be more like 8 percent.

As businesses pull back and lay off workers, Americans who have lost their jobs will be unable to pay off their credit cards, car payments, and home mortgages, resulting in a further tightening of the credit market, further reduction of consumer spending, and a further downward spiral of the U.S. economy. Could we really see a GDP contraction of 8 percent for the fourth quarter? Looking at what has been happening in the U.S. economy over the past month, I'm seriously wondering if that could be true.

We will have to see.

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