Stiglitz Forecasts Financial Doom, Gloom

Columbia University professor and Nobel laureate Joseph Stiglitz is not optimistic about the prospect of the American Dream as the country moves into 2012. Stiglitz waxes philosophical about the country’s growing wage gap, terminal unemployment and financial crises that have erupted in multiple areas of the world. He opines that working on long-term problems like fiscal debt could actually solve short-term problems like unemployment if the world’s power players were not rooted in politics as usual. The fear, Stiglitz says, is that the system will cataclysmically right itself before cooler heads prevail. For more on this continue reading the following article from Economist’s View.

I think it would be fair to say that Joe Stiglitz isn't predicting a return to general prosperity anytime soon:

The Perils of 2012, by Joseph E. Stiglitz, Commentary, Project Syndicate: The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope. President John F. Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.

In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.” Now those dreams, too, are receding. ...

This year is set to be even worse. It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to 6% or 7% (the pre-crisis level of 4% or 5% is too much to hope for). But this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems. ...

Meanwhile, long-term problems – including climate change and other environmental threats, and increasing inequality in most countries around the world – have not gone away. Some have grown more severe. ...

I'm not sure it was intended as a joke, but this part made me laugh: "It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs..."

This article was republished with permission from Economist's View.

Return of Depression-Era Economics

Some economists are arguing for a shift in economic perspective as the U.S. faces the threat of credit default while struggling to lift itself out of a recession that many observers deny still exists despite high unemployment and market instability. The doctrine of supply-side economics is not holding true as the country segues into a position of a lack of demand to keep up with production. No one wants to face the prospect of inflation, including policy makers at the Federal Reserve who continue to dodge it through regulatory means, even though many economists feel it is obvious that inflation is the only thing that will stave off an actual Depression that could cause the country and the world to fall into a financial tailspin. For more on this continue reading the following article from Economist’s View.

Paul Krugman is taking a break from his column today (Arrrr!), so here's a summer rerun. Can you guess when he wrote this?:

Stop worrying and learn to love inflation, by Paul Krugman: ...depression economics - the kinds of problems that characterized much of the world economy in the 1930s but have not been seen since - has staged a stunning comeback.

Five years ago hardly anybody thought that modern nations would be forced to endure bone-crushing recessions for fear of currency speculators; that a major advanced country could be persistently unable to generate enough spending to keep its workers employed; that even the Federal Reserve would worry about its ability to counter a financial market panic. The world economy has turned out to be a much more dangerous place than we imagined. For the first time in two generations, failures on the demand side of the economy - insufficient private spending to make use of the available productive capacity - have become the clear and present limitation on prosperity for much of the world.

Economists and policymakers weren't ready for this. The specific set of silly ideas known as 'supply-side economics' is a crank doctrine, which would have little influence if it did not appeal to the prejudices of wealthy men; but over the past few decades there has been a steady drift in thinking away from the demand side to the supply side of the economy. The truth is that good old -fashioned demand-side macroeconomics has a lot to offer in our current predicament - but its defenders lack all conviction.

Paradoxically, if the theoretical weaknesses of demand-side economics are one reason we were unready for the return of depression-type issues, its practical successes are another. Central banks have repeatedly managed demand - cutting rates to keep spending high - so effectively that a prolonged slump due to insufficient demand became inconceivable. Except in the very short run, then, the only limitation on economic performance was an economy's ability to produce - that is, the supply-side. ...

The question of how to keep demand adequate to make use of the capacity has become crucial. Depression economics is back. ... The free-market faithful tend to think of Keynesian policies - deliberate efforts by governments to stimulate demand - as the enemy of what they stand for. But they are wrong. For in a world where there is often not enough demand to go around, the case for free markets is a hard case to make. ...

The right perspective is to realize how very much good free markets and globalization have done; the point is to preserve those gains. One cannot defend globalization merely by repeating free-market mantras as economy after economy crashes. If we want to see more nations making the transition from abject poverty to the hope of a decent life, we had better find answers to the problems of depression economics. ...

I don't like the idea that countries will need to interfere in markets - to limit the free market in order to save it. But it is hard to see how anyone who has been paying attention can still insist that nothing of the kind needs to be done, that financial markets will always reward virtue and punish only vice.

One of the most important obstacles to sensible action, however, is prejudice -by which I mean the adherence of too many influential people to orthodox views that are no longer relevant to our changed world. ...

This brings us to the deepest sense in which depression economics has returned. The quintessential economic sentence is supposed to be 'There is no free lunch'; it says that there are limited resources; to have more of one thing you must accept less of another. Depression economics, however, is the study of situations where there is a free lunch, if we can figure out how to get our hands on it, because there are unemployed resources that could be put to work.

In 1930, John Maynard Keynes wrote that 'we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand'. The true scarcity in his world - and ours - was therefore not of resources, or even virtue, but understanding.

Originally published, 6.20.99

Then, as now, he points to inflation as the answer to a liquidity trap:

So what should we be doing differently? ... Japan, having fallen in its liquidity trap - unable to recover by means of conventional monetary policy, because even a zero interest rate is not low enough - and having exhausted its ability to spend its way out with budget deficits, must now radically expand its money supply. It must convince savers and investors that its current deflation will turn into sustained, though modest, inflation. Once the Japanese make up their mind to do this, the results will startle them. ... There is no economic evidence suggesting that inflation at the ... 4 per cent rate I believe Japan should target, does any noticeable harm; and the things advanced countries need to do to counter depression economics do not involve any compromise of the commitment to free markets. ...

This blog post was republished with permission from The Economist's View.

House Prices in Southern California Slip Further

Southern California real estate prices are still falling due to tight credit, high unemployment and economic uncertainty. Read more about this in the full blog post from The Mess That Greenspan Made.

It’s been a while since I’ve looked at Southern California real estate prices and it looks as though things aren’t getting any better there, Jon Lansner at the Orange County Register filing this report on the latest findings from DataQuick.

There have been no mentions of DataQuick here at the new blog over the last year, but, at the old blog, a simple search shows a ton of them, most referencing Marshall Prentice who, in 2005, promised that “most or all of of those gains are here to stay." Ah… memories...

This post was republished with permission from The Mess That Greenspan Made.

Unemployment Claims Show No Progress

A rise in new filings for unemployment benefits and a lack of progress in continuing unemployment claims suggests that the man on the street may feel like a new recession has arrived. Although it may not technically be considered a recession, the high employment will hamper growth by influencing consumer spending. See the following post from The Capital Spectator.

Today’s update on weekly jobless claims isn’t very encouraging for expecting a big positive surprise in tomorrow’s news on nonfarm payrolls for July. And that's the charitable interpretation. But judge for yourself: the latest number on new filings for unemployment benefits shows a rise of 19,000 last week, bringing the weekly total to 479,000—the highest since early April. The year is more than half over and still no sign of improvement in this metric. So much for a V recovery, at least as far as new jobless claims go.

Yes, this data series has a history of moving sideways and sometimes even rising after recessions, as we’ve discussed. But that’s cold comfort these days, when the labor market is struggling with it’s biggest challenge since the Great Depression. On a number of levels, the losses suffered in the job market are unprecedented since the 1930s. And as the weeks and months roll on without convincing signs of a rebound, it’s getting tougher to imagine that a revival of consequence is imminent. We can debate if the jobless claims trend of late is normal or not, but that doesn't change the fact that the longer this series goes nowhere, the greater the headwinds for growth. Translated: the labor market is, to put it mildly, a key factor in the business cycle, particularly in America where consumer spending is still the dominant slice of the economic pie.



The risk of a double-dip recession may still be slight, in terms of expecting GDP to post losses in the quarters ahead. But if the labor market continues to stagnate, it will feel like a new recession has arrived for the man on the street. Or, perhaps it’s more accurate to say that the old recession never really ended for the average American.

Indeed, today’s weekly unemployment-benefits report tells another troubling story with continuing claims, which tracks the number of unemployed workers who were already collecting jobless benefits. As the trend in this metric strongly suggests (see chart below), there’s no sign of progress here either.



No wonder that investors are rushing back into Treasuries this morning. Until the economic data signals a change in the trend, yields will inch lower, fears of deflation will continue to bubble, and the crowd will be increasingly open to arguments that the “new normal” has legs.

"Treasurys are certainly benefiting from fears that the jobs figure will be another nail in the coffin for the economy as the jobless claims number now implies downward risk to nonfarm payrolls tomorrow," Tom di Galoma at Guggenheim Partners, told MarketWatch.com today. Yes, there’s a counterargument to that view. But at this late date you need numbers to make such a case. For the moment, the necessary stats are MIA.

This article has been republished from James Picerno's blog, The Capital Spectator.

Job Numbers Lack Any Significant Trend

New unemployment filing trends continue to bounce around as the US economy continues a sluggish recovery. While some see current trends as an indication that new job growth in nonfarm sectors is stalling or declining, analysts believe that it may take months before a clear trend in the labor market can be identified. See the following post from The Capital Spectator.

Today’s update on weekly jobless claims is more of the same. New filings for unemployment benefits continue to bounce around in the seasonally adjusted weekly range of 450,000-500,000. That’s been true all year, and today’s report doesn’t change anything. The longer this goes on, the stronger the case for thinking that the rebound in the labor market is going to be sluggish—perhaps more so than even the generally muted expectations of a month ago.

As for the number du jour, new claims rose by 12,000 last week to a seasonally adjusted 472,000, the Labor Department reported today. That’s obviously a change in the wrong direction, but we’ve been here before and we may be here for a while yet. As our chart below shows, the trend for jobless claims has been trendless since last November. The sideways action isn’t unprecedented in post-recession periods, but the potential for trouble this time is substantially higher, given the unusually steep losses in nonfarm payrolls over the past two years.

"We need faster growth in employment, and we’re not at that point yet," Michael Englund, chief economist at Action Economics LLC, told Bloomberg News in advance of today’s report. "Whether we have adequate economic growth to bring down the unemployment rate significantly remains to be seen."

Indeed. Economic data rolls out with a substantial lag, and it takes months to see signs of a robust trend, for good or ill. The labor market news of late has been mixed, at best. Today’s jobless claims suggest it’s best not to expect much more, if that, in the weeks ahead. The meandering of jobless claims signals that it may be time to downgrade expectations for growth in nonfarm payrolls. The May employment report said more or less the same thing.

And on the subject of downgrading expectations, don’t expect much of anything tomorrow in the way of fresh statistical meat. Friday’s scheduled lineup of economic updates is nil. Into this numerical abyss comes tomorrow's quadruple witching for the markets. The absence of economic news and the potential for lots of unwinding in derivatives approaches. It’s a perfect metaphor for the road ahead. Lots of noise, light and heat, but nothing really changes much.

"We're going to see a lot of back and forth action," predicts Brian Belski, chief investment strategist at Oppenheimer and Co. via CNBC.com. "It's a trader's paradise."

This post has been republished from James Picerno's blog, The Capital Spectator.

State Governments Still Cutting Jobs To Meet Balanced Budget Requirements

Government jobs have been trending downwards as local and state governments struggle to balance their budgets. The inability for local governments to improve the job situation in difficult times may be a weakness of the balanced budget requirements. See the following post from Economist's View.

State and local governments could use more help:

State and Local Governments Continuing to Lose Jobs, Off the Charts: States and localities cut 22,000 jobs in the past month, wiping out half the month’s gain in private-sector jobs... In total, state and local governments have cut 231,000 jobs, including 100,000 local education jobs, since the summer of 2008.




This is a problem for the economy as a whole, because local businesses suffer when teachers and others don’t have paychecks to spend. These new figures are further evidence that Congress needs to include aid to states in its upcoming jobs bill...

This is a no brainer, but Congress hasn't done anywhere near enough to help so far, and it is unlikely to do so now even for the "low hanging fruit". I think one of the lessons of the crisis is that we need to develop better mechanisms to prevent state and local government from magnifying the effects of crises. The balanced budget requirements that that most state and local government operate under cause them to decrease demand at a time when they should be boosting it.

This post has been republished from Mark Thoma's blog, Economist's View.

Forecasters Predict Half A Million New Jobs In May

While May's numbers are predicted to reveal an encouraging half million new jobs, there are several factors still hindering a strong jobs recovery. The most damaging of these factors may be the continuing trade imbalance with China which may require a stronger approach if the US is to bring unemployment down to acceptable levels. See the following post by Professor Peter Morici from The Street.

Economists expect a strong jobs report for May, but the unemployment rate is expected to ease only slightly.

The Labor Department on Friday will release May employment data and forecasters expect something north of 500,000 new jobs. Many jobs, however, are in the public sector reflecting stimulus spending. Manufacturing is expected to add a respectable 30,000 new positions.

Unemployment is expected to only fall to 9.8% from 9.9% in April because many sidelined adults, sensing improved conditions, started looking for work.

The big challenge is to keep gross domestic product growing at least 3% to pull down unemployment.

Much recent growth has been inventory adjustments, and sustainable growth, reflected in real consumer and business investment demand, has been only about 2%. As stimulus spending tails off, new sources of demand will be needed.

If the economy keeps growing at 3% the balance of 2010 demand for new capacity -- improved rental housing, better located new homes, and commercial construction for retail and factory improvements -- should accelerate in 2011. Auto sales, currently a bit above 11 million a year, should move up to 12 million plus with noticeable multiplier effects in the Midwest and upland South.

Fiscal problems in Greece, Spain and elsewhere in Europe and dallying by European leaders in addressing fiscal imbalances and problems at banks pose genuine threats to global recovery. Obama administration and Federal Reserve support of the International Monetary Fund contribution and dollar currency swaps were sound responses.

European leaders, resisting genuine bank stress tests and transparency about bank capital requirements, and blaming short selling and Anglo-Saxon capitalism for problems created by their own hands, reinforce the growing judgment of financial markets that European leaders are incapable of accomplishing adequate systemic reforms to rehabilitate their economies. Europe seems forever mired in adolescent denial and alibis -- a malignant European character flaw.

On this side of the pond, greater realism is needed about U.S. budget challenges as the recovery continues or America will join Europe down the proverbial drain of financial self abuse. Near term, demand must be fired up to significantly dent unemployment.

The economy must add more than 13 million mostly private sector jobs to bring unemployment down to 6% by the end of 2013.

Businesses need customers and capital to invest in new facilities and jobs and private demand growing at less than 2% and troubles at regional banks remain huge problems.

The trade deficit -- in particular huge imports of oil and the imbalance with China -- cuts a wide hole in demand for U.S. goods and services. Without addressing oil and China, creating enough new jobs is daunting.

Detroit has the technology to produce much more efficient vehicles now and a shift in national policy to rapidly build these would push out imported oil and create many new jobs.

China maintains an undervalued currency that makes its products artificially cheap and deceivingly competitive on U.S. store shelves and it practices virulent protectionism against U.S. exports.

China will not respond to diplomacy and reason. President Barack Obama and Treasury Secretary Timothy Geithner should quit the hand-wringing and implement comprehensive policies to counter Chinese abuse of free trade. That would begin with a tax on dollar-yuan conversions that would raise the price of Chinese imports to their true cost to the U.S. economy.

Regional banks, which serve small- and medium-sized businesses, remain burdened by failing commercial real estate loans and mortgage-backed securities. The Troubled Assets Relief Program was intended to remove many of those loans from their books but has often been abused by policymakers to aid political constituents on Wall Street and Detroit.

A Savings and Loan Crisis-era Resolution Trust could relieve regional banks of troubled loans, earn a profit for the government, and give small- and medium-sized businesses adequate bank credit again.

This post has been republished from The Street, an investment news and analysis site.

30 States Take Out Loans To Pay For Unemployment Benefits

California and more than 30 other US states have taken out loans to pay for jobless benefits. With repayment of these loans starting in 2011, many of these cash-strapped states have raised unemployment insurance taxes - further discouraging employers and potential employers from adding new jobs to the economy. See the following post from Expected Returns.

California takes down the prize for being the state with the worst finances, followed closely by abut 40 other states. States are starving for cash, which will result in higher taxes and cuts in services. States can't even come up with the cash to insure millions of unemployed Americans who are watching this apparent economic recovery unfold from the sidelines. From Reuters, California leads in borrowing for jobless benefits:

The Golden State has borrowed $8.8 billion so far to cover jobless benefits during a recession where the national unemployment rate crested above 10 percent. It is not alone. More than 30 states have had to take out similar, albeit smaller, federal loans to keep their unemployment benefit systems afloat.

Their combined debt tops $40 billion and the U.S. Labor Department expects 40 states to be in debt to the federal government by year's end, underscoring the labor market's problems in the deepest recession since World War Two.

To give cash-strapped states a break, the federal economic stimulus program enacted last year suspended interest on the loans to states for two years. Without an extension, interest payments resume next year and Washington could raise payroll taxes on employers in delinquent states if loan balances remain outstanding.

State leaders fear that would derail a jobs recovery which they need so employers replenish bare state coffers and enable states to repay the unemployment loans.

States will have to start repaying loans to the federal government in 2011 at around 5% interest. This is money that is coming directly from states budgets at a time of crisis. One must question how long states can defer the repayment of debt into the future before a crisis unfolds.

Rising Taxes Guaranteed

By 2012 employers in 25 states, including California, New York and Texas, could face rising federal payroll taxes if unemployment loans remain outstanding, which analysts expect they will, said Rich Hobbie, executive director of the National Association of State Workforce Agencies.

"They can't completely solve their problems in the near term," Hobbie said. "If we have eight years of sustained growth as we had back in the 1980s then the states have a shot of repaying their loans."

In order to raise cash, states have raised unemployment insurance taxes. The net effect is that employers are even more wary to hire new workers, which makes the unemployment situation even worse. Taxes are bound to increase, although the proper response in this situation would be to cut spending dramatically. But we know this isn't going to happen.

This post has been republished from Moses Kim's blog, Expected Returns.

Does Extended UI Benefits Increase Unemployment?

Despite the common idea that extending unemployment benefits will result in the unemployed lasting for longer periods of time, recent data analysis indicates that extending unemployment insurance benefits has only a modest effect on the rate of unemployment. While there are always a few who will seek to take advantage of government programs, there can be a good case made that extended benefits are needed during the severe labor market downturn. See the following article from Economist's View.

Republicans have been worried that extensions to Unemployment Insurance are causing higher levels of unemployment, but Rob Valletta and Katherine Kuang of the San Francisco Fed say those worries are unfounded.

Extended Unemployment and UI Benefits, by Rob Valletta and Katherine Kuang, Economic Letter, FRB SF: Unemployment duration, or the amount of time that an individual remains unemployed, reached new historical highs in 2009. The spike in unemployment duration is among the most compelling indicators of the severe economic dislocation caused by the recent recession. At the same time, however, following congressional legislation that temporarily extended eligibility for unemployment insurance (UI) benefits, the maximum period for UI claims also reached new historical highs. As of late 2009, individuals in most states were eligible for up to 99 weeks, or nearly two years, of UI benefits, well above the normal limit of six months. The question arises whether this extended availability of UI benefits has contributed to a lengthening of unemployment spells because jobless workers are staying in the labor force longer in order to continue collecting benefits. Such a dynamic could raise the unemployment rate. However, analysis of data on unemployed individuals decomposed by their reason for unemployment, which affects their eligibility for UI, suggests that extended UI benefits have had a relatively modest effect. We calculate that, in the absence of extended benefits, the unemployment rate would have been about 0.4 percentage point lower at the end of 2009, or about 9.6% rather than 10.0%. ... It is not surprising that the disincentive effects of UI would loom small in the midst of the most severe labor market downturn since the Great Depression. ...

When I was a kid in school, I can remember how mad I'd get when the misbehavior of one one or two people would cause the whole class to lose privileges. I hated that.

No matter how hard we try to stop it, people are going to find ways to take advantage of government programs. There will always be one or two people in every "class" who will misbehave, and people opposed to programs will turn them into very public examples of how these programs fail. But these few examples shouldn't stop us from doing the right thing and helping all the people who use these programs as intended, people who rely upon them when, say, they lose jobs due to a poor economy.

The problem isn't lazy workers taking advantage of government programs as some would have you believe. Job openings are few and far between, and until that changes workers will continue to have difficulty finding employment.

This article has been republished from Mark Thoma's blog, Economist's View.

Lack Of Fiscal Stimulus Will Result In Slow Jobs Recovery

Mark Thoma believes that the lack of fiscal stimulus for jobs will likely lead to a slow and drawn out recovery of the jobs sector. While he suggests that an aggressive stimulus would have prevented significant job losses, he concedes that it is extremely difficult for policy makers to take preemptive action. See the following post from Economist's View.

I've been pushing hard for more help for labor markets for quite awhile -- at times I've thought it was a bit repetitive, but necessary -- but it's probably time for me to give up and accept that we are going to have a slower recovery than we could have had with more aggressive fiscal policy. Unless there is a dramatic reversal of recent indications that we are at the beginning of a recovery, Congress is not going to provide anything more than token help from here forward.

The fiscal policy response to the crisis has been disappointing. Monetary policy loses its effectiveness in a recession. There are some things monetary policy can do -- important things such as injecting liquidity into fearful, frozen financial markets to prevent a complete meltdown of the system. But when it comes to providing a big shock to aggregate demand sufficient to turn the economy around and propel it back toward full employment, monetary policy alone isn't enough. It's true that monetary policy can lower real interest rates -- even at the zero bound for the federal funds rate, it's still possible to use quantitative easing to nudge long-term interest rates downward -- the problem is that all this does is create an incentive for more investment and consumption (mainly of durables), there is nothing to guarantee that people will actually respond. My reading of the evidence is that to the extent that households and businesses do respond to lower real interest rates during a recession by consuming or investing more, the response is not very strong.

Because monetary policy loses effectiveness in a deep recession -- something I've been teaching for decades -- I was among the first to call for aggressive fiscal policy. Fiscal policy creates demand directly, it does not rely upon incentives and the hope that people will respond to them. When the crisis hit, we needed fiscal policy right away. Given the lags between changes in policy and actual effects on the economy, which were known to be lengthy, and given that monetary policy was not going to be enough, there was no time to "wait and see" (as many people I respect were calling for). But the reality is that fiscal policy didn't get put into place until much, much later, far too late to stop the worst of the downturn (and it wasn't big enough anyway). The way too slow policy process, and the way too small policy that came out of it, was frustrating to watch.

I think we'd be much better off today if we'd done what is necessary right away instead of hoping and hoping that things weren't going to be so bad, and that we could escape the need for an aggressive policy intervention. This crisis has taught me that policy of that magnitude is nearly impossible to put in place based upon what looks to be happening, i.e. before the recession actually occurs. There must be clear evidence that a severe recession is actually underway before policy will be considered. Unfortunately, by that time it's too late to prevent the worst part of the downturn.

Now that we are hitting the other side, I'm feeling frustrated again with the lack of action from policymakers. I expect the recovery to proceed at a snail's pace, labor markets in particular. If employment rebounds quickly, great, but that's not what I think is going to happen, and that's not what the evidence suggests. If the recovery is going to be slow, then it's not too late to provide more help. Instead of getting back to full employment by, say, 2013, we could get there sooner if we act now. I'm not the greatest artist in the world, but I even drew a picture:



Why settle for the blue line recovery when the green line is possible? Frustration over the fact that we seem to be headed on the blue-line trajectory explains why I've been reluctant to highlight what little good news there has been about labor markets recently. I don't want to jump on the "things are getting better" bandwagon when there is still more that policymakers can do to help, and when there are still considerable uncertainties about the strength of the budding recovery.

But, as I said at the beginning, even though it's not too late for more help to make a difference, it's not going to happen. Now that the recovery seems to have started and the budding optimism is apparent, we will turn our attention elsewhere, to financial reform, to global warming, and to other issues. We'll forget about all the people who could have been working, but instead have to hope Congress doesn't cut off their unemployment insurance before they can find a job.

I'll still complain -- there's no reason to let policymakers off the hook -- but it's time to give up the hope that anything more will be done to help the unemployed find jobs.

This article has been republished from Mark Thoma's blog, Economist's View.

Central Bank Warns Of Long-Term Job Problems

The head of the Chicago Federal Reserve Bank recently indicated that the Fed will likely maintain its bias towards low interest rates due to the continuing lack of job growth in the economy. Furthermore, with this high unemployment, workers are taking longer to find work, which can ultimately lead to permanent income reductions for some workers as well as an extended period for the economy's job market woes to subside. See the following article from The Capital Spectator.

We've heard this before but we need to hear it again. Today the message comes from Charles Evans, president of the Chicago Federal Reserve Bank. "A number of labor market issues… lead me to think this accommodation will likely be appropriate for some time," he said in prepared remarks delivered at a speech in Washington. In other words, the central bank will keep interest rates low for the foreseeable future. The lack of job growth is the main catalyst. How long will the easy money last? "I think six months is a good time period to say I think we'll have accommodative policy like we have today."

If this is what passes for optimism, and arguably it is, there's a case for thinking that the crowd needs to recalibrate its expectations. Indeed, there's more at stake than speculating on when the price of money will rise. Low rates this time are a reflection of structural problems in the economy, and even looking out six months doesn't necessarily change all that much, even if rates start to move higher by that point. Evans laid out the ugly details in his talk today:

The rise in long-term unemployment may have ramifications for the economy going forward. The likelihood of finding a job tends to decline as an individual remains out of work for a longer period. Partly this reflects the fact that those who typically have a difficult time finding work will tend to be unemployed longer. In this case, longer spells are a symptom rather than the source of an underlying problem. However, a long unemployment spell could itself cause deterioration in a worker’s skills, leaving some of the long-term unemployed with less bright job prospects even as the economy begins to revive. This could contribute to high average unemployment duration for some time.

One of the smoking guns for thinking this is the future that awaits comes by way of the duration of unemployment. "In February," Evans explains, "over 40% of the unemployed were in the midst of a spell lasting more than six months, by far the highest proportion in the post-World War II era."

The trend of rising duration this time around was graphically shown in a chart Evans used in his talk, which is reproduced below. The graph plots the jobless rate (horizontal bar) vs. the average length, or duration, of unemployment since 1947. The basic trend is that duration rises as the unemployment rate increases. When the Great Recession began, the jobless rate was roughly 5% and duration was around 17 weeks. In other words, we began the current contraction in a weakened state that was substantially worse than usual. And it's deteriorated ever since.

Indeed, the red dots in the chart above show the monthly statistics for 2008 and 2009. The bottom line: the jobless rate and the average length of unemployment are at the highest in more than 60 years. This is disturbing for obvious reasons, along with some not-so obvious ones. As Evans said, "The likelihood of finding a job tends to decline as an individual remains out of work for a longer period." The not-so-astonishing implication:

…long-term unemployment tends to lead to permanent earnings losses, particularly for those who have previously invested heavily in job- or industry-specific skills. So, high unemployment durations could have long-lasting effects on consumer confidence and demand.

In other words, there's a heightened risk "that the recovery in labor markets could be slow even as output returns to a well-established growth path," he said.

You didn't necessarily hear it here first, but rarely has the warning been so loud and clear from the central bank's upper ranks.

This article has been republished from James Picerno's blog, The Capital Spectator.

Why There Is Resistance For Government Creating Jobs

Why do we hesitate to create jobs when we know people are struggling and could use some help? One reasons is that it can be difficult to reconcile helping a stranger who you will never meet by hiring him to do work that may not benefit you. Mark Thoma from Economist's View discusses the resistance for more government spending to create needed jobs.

In a town in a country suffering through a recession, a wealthy person just happens to live next door to an unemployed worker. The worker has experience in a variety of trades, and is quite competent, but despite his skill and reputation, there are no jobs to be found. And it isn't for lack of trying.

Seeing this, and having a kind heart, the wealthier of the two -- much, much wealthier -- decides his neighbor needs a job, so he sets about creating one. The first option he considers is just to find something for him to do, it doesn't much matter what, digging holes and then filling them up, whatever. He decides that if he goes this route he will ask his neighbor -- wink wink -- to watch his grass grow. Both of them know this is a ruse, a made up job to justify the payment, but somehow having the ruse in place allows the unemployed neighbor to keep his dignity in a way a direct cash payment would not. It's a job not a hand out -- he does have to look out his window a few times a day to make sure it the grass is growing like it's supposed to. But practically it's a means of support for the neighbor and his family that allows him to continue his diligent search for a job.

But then the wealthy neighbor thinks, why not hire the unemployed neighbor to do something useful with his talents? Sure, it will make it harder for him to look for another job if he's working hard here all day, but he's a good builder and there must be something I need. Maybe, for example, the fence could be replaced. He was going to replace it in a few years anyway and, although it would last a bit longer, why not fix it now and take advantage of the fact that the neighbor can be hired for much less than it would take to hire a fencing company? The quality of the work will be just as good. And there must be other things that could be done both inside and outside the house as well.

There is one problem, he realizes, with the fence building option. Unlike the watching the grass grow job which could have started the next day, it will take him awhile to pick out the fence style he wants, to plan it, to get the materials for the neighbor (who can't finance it himself since he's unemployed), and so on, but maybe not too long if he gets on it right away. But it is a close call - the family is hurting - and any delay makes it worse.

Still, building the fence turns out to be the solution chosen. It's a generous arrangement, and everyone feels as though they are getting something. And it dispels any myth that jobs cannot be created. By hiring a neighbor to do something, especially something productive, a job is created that wouldn't have existed otherwise. Since the payment for the fence materials and the fence work comes out of saving, saving that would not have been spent until a few years later, it also increased the demand for goods and services overall, perhaps just enough to save a job at one of the places where the money is spent or even help to create a new job. (The money is just sitting in the banks doing nothing due to all the fear and loathing about loaning it out, i.e. the money spent on the fence is not being used by the bank to finance alternative investment. It's as though the money was hidden in the house in a cookie jar or something. It would have been used later, but is being used now instead and that generates extra demand.)

So here's the question. Why does having government involved make any difference? Government can act as an intermediary, take the money from the wealthy person, and use it to finance projects such as new infrastructure. This type of social insurance creates jobs just the same as someone can create a job when they hire a neighbor to build a new fence or repair one that is falling down.

One difference is that the money goes for the social good, not the individual good. Suppose the money is used to build a fence at a local park. The wealthy person might not object if he or she uses the park frequently and would somehow benefit from a fence. But if the money goes to finance something that the person doesn't want or don't need, there might be quite a bit of resistance.

But that is a question about the social benefits from how the money is used, it has little to do with the question of whether jobs can be created. Just as the wealthy neighbor can hire the unemployed worker next door to build a needed fence or to watch the grass grow, government can do the same, and do it with the same motivation -- empathy for those who are struggling to make it through the recession. If those paying taxes don't share that empathy -- if the people paying the bills don't think those receiving the money deserve it according to some moral code, if they can't see much direct of indirect value for themselves from the expenditure they are forced to finance, and if they don't think this is their responsibility -- there will likely be strong resistance to paying the bill (partly because the personal relationships needed to generate empathy aren't there).

So yes, to the extent possible, job creation projects should be used to finance needed infrastructure so that we do not have to rely on empathy. When the benefits are large and obvious to all, the resistance to such spending is minimized.

But that may not be possible. If the wealthy neighbor doesn't need anything done or doesn't have enough projects to keep the unemployed neighbor busy -- he had just hired people to fix his fence last week and can't think of anything else he needs, or the things that are needed would take to long to get started, what then if he still wants to help? He will have to find what he can for the unemployed neighbor to do -- there's usually something that is needed. And if, in the end, it comes down to the equivalent of watching grass grow (and it's very clear the neighbor is trying as heard as he can to find a permanent job), then it may be time to give a wink and do just that. The alternative is to simply say I'm sorry, there's nothing I can think of to hire you to do, neighbors aren't my responsibility anyway -- I hardly know you people -- and then turn and walk away leaving the neighbor and his family to continue struggling. And maybe that is the right answer. That is, it's the right answer until the day comes when you lose all your wealth in the Great Crash of 2015 and your neighbor, who has done extraordinarily well and has never forgotten the help you gave him, steps in to return the favor.

Of course, not all of us are lucky enough to have rich, empathetic neighbors willing to help out when we are down on our luck, nor can we necessarily expect reciprocity when we are in need. But that's OK, we do have fiscal policy -- a form of social insurance -- and other types of social insurance to play this role.

Fiscal policy can create jobs and provide other types of help just like a wealthy, benevolent neighbor. Yes, if you are able, if you are one of the fortunate ones, the presence of social insurance requires you to pay to help those who in need. But even if the money isn't used to finance something you want, or if it is essentially given away through make-work to people you don't think deserve it, people that you care nothing about and that aren't your responsibility in any case, you will still benefit. Because even though you are certain it could never happen to you, in fact it can happen to you, and if it ever does social insurance, including job creation, will be there for you too. Only then will you truly understand the real value that this insurance provides.

This post has been republished from Mark Thoma's blog, Economist's View.

More Red Ink For The Job Market In February

Unofficial job reports from ADP and Challenger, Gray & Christmas show another month of net job losses in February. While the losses continue to shrink, a huge number of new jobs will be needed to put a dent in the 8 million jobs lost since the recession began. See the following post from The Capital Spectator.

Two new private-sector reviews of last month’s labor market show that the economy is still shedding jobs. The only good news is that the rate of loss continues to slow. But a loss is still a loss at this late date in the economic cycle, and today’s numbers suggest that Friday’s monthly update on jobs from the government may suffer another round of red ink, albeit in relatively mild form.

The ADP National Employment Report advises that nonfarm private payrolls in the U.S. slipped by 20,000 last month. "The February employment decline was the smallest since employment began falling in February of 2008," according to the accompanying press release.

Was winter weather to blame? Perhaps, although ADP minimizes that gremlin. Again quoting from the company's press release:

Two large blizzards smothered parts of the east coast during the reference period for the BLS establishment survey. The adverse weather had only a very small effect on today’s ADP Report due to the methodology used to construct it. However, the adverse weather is widely expected to depress the BLS estimate of the monthly change in employment for February, but boost it for March. Therefore, it would not be unreasonable to expect the BLS estimate for February (due out this Friday) to be less than today’s ADP Report even though the BLS estimate will include the hiring of temporary Census workers not captured in the ADP Report.

It's come to this: hoping for salvation from the Census Department. So it goes at a time when any scrap of good news, temporary or otherwise, is pounced upon as a pinpoint of light in the dark tunnel of job creation.

Meanwhile, another report from employment services firm Challenger, Gray & Christmas reports more than 40,000 jobs were eliminated last month. That's comfortably below January's 70,000-plus cuts, the firm notes via CNNMoney.com. Nonetheless, it's hard not to notice that two independent reports today indicate the same general trend: another round of job losses for February.

If the Labor Department's update on Friday makes it three, February's retreat will mark nonfarm payrolls' net decline in 25 of the previous 26 months, according to the official government tally. Yes, it's getting better, which is to say the losses are diminishing, but the question still remains: When is net job growth coming? As we wrote last month, "the longer this drags on, the higher the odds that we're facing an even weaker post-recession job recovery than previously anticipated."

With each passing month of loss, the stakes are higher for the necessity of minting jobs. The real challenge isn't one of simply seeing a net gain on the payrolls ledger. That's coming, and perhaps soon. But what's needed is more than a statistical change, i.e., a lengthy stretch of large gains on the order of 200,000, 300,000, and more a month. Unfortunately, almost no one expects that's imminent. Yes, seeing 10,000, 50,000 or even 100,000 net new jobs will be refreshing (when it actually arrives), but that thimble of repair is no match for the tidal wave of 8 million-plus lost jobs since the Great Recession began in December 2007.

As troubling as this is, it's all the more problematic in a world that's just coming to terms with the debt and deleveraging that's weighing on the global economy. Greece and, increasingly, Britain are only the beginning of new world order. The U.S. is part of this infamous club too. And let's not forget the veteran of debt and deleveraging: Japan.

What are the implications for all this red ink? History suggests remaining humble in forecasting a quick and easy solution.

This post has been republished from James Picerno's blog, The Capital Spectator.

How Washington Can Help The US Worker

As job losses continue and the unemployment rate remains high, the claim that the first economic stimulus package helped create long-term jobs is heavily disputed. Eric Jackson from The Street says that helping existing businesses remain competitive and thereby reducing the need for redundancies would be a better route to take. See the following post from The Street.

With last Friday's announcement that the economy lost another 85,000 jobs in the month of December and an unemployment rate still above 10%, renewed pressure is on the federal government to create jobs.

However, the truth is that it can't create any new jobs -- at least ones that are going to last beyond any short-term project. A new study shows the government's efforts had virtually no impact on changing the jobless rate.

We endlessly hear about the unemployment rate and the need for jobs. Many economists and politicians are now talking about the need for more jobs and a second stimulus. However, we need some clear headedness about this discussion.

What exactly can government do to fix this problem of too many unemployed or under-employed? I think the honest answer is not much directly or immediately. It can only create jobs in the long term and indirectly, through following policies that enable businesses to better compete.

The government passed a $700 billion TARP program to aid the country's financial institutions in the fall of 2008. By measure of the fact that all the big banks and brokers are still around today, with much of the money repaid to the American taxpayer, this program was a success.

We can quibble about whether the big banks such as Citigroup(C Quote), Bank of America(BAC Quote), and Wells Fargo(WFC Quote) are lending enough or how much Goldman Sachs(GS Quote) and Morgan Stanley(MS Quote) are paying their top performers, but the fact remains that these institutions are still standing today. We weren't so sure they would be 12 short months ago.

On the heels of the TARP program, the government passed a $789 billion first stimulus program. The money, although large, was seen by leading economists, the Federal Reserve chairman, virtually all Democrats, and many Republicans as necessary to reviving the struggling economy.

As of today, only half of this money has been spent ($400 million). The reason for this is that, even with the best of intentions, government can rarely directly inject money (and jobs) into an economy.

Politicians give primary importance these days to getting re-elected and the way to do this is through seeming to respond to the top needs of their constituents. When the first stimulus was passed, politicians could slap themselves on the back and say they'd addressed the problem of the weak economy. The press also moved on to other topics, rather than continue to follow up on just what this money had been spent on and how effectively that stimulus had resulted in jobs.

This week, the Associated Press, to its credit, did some investigative reporting. It looked at specific construction projects that were part of the first stimulus and how well they did at creating jobs -- and reducing unemployment -- in those counties. It turns out -- and their findings were validated by five economists -- that there was no correlation between dollars spent and those counties seeing a lower unemployment rate.

The president and his team continue to point to 1.6 million as the precise number of jobs which the first stimulus is responsible for saving or creating. However, the AP found that most economists agreed that it was virtually impossible to tie monies spent as part of the 400-page law to specific job outcomes in order to be able to cite a specific number of jobs created or saved.

The White House has also recently determined that they can identify certain jobs as being "stimulus-saved jobs" even if they were never at risk of being lost.

When it comes to coming up with new projects, such as repairing roads, it might take months from the time a bill is passed until a job actually begins -- and that's assuming that there are delays from zoning or other planning requirements, which is more often the case. Even when these government-sponsored projects start and jobs are created, they are so insignificant when compared to the other jobs that are being lost in those same areas.

Here are implications from this one study, as we prepare to hear politicians sell us on the idea of a second stimulus.

• Just spending billions of taxpayer dollars on government programs that aren't defined is likely to be a wasted effort.

• We should only spend money in areas which have been shown to clearly make an appreciable difference to lowering unemployment.

• If you're going to start a construction project, it should have a definable purpose (as opposed to the "bridge to nowhere") and it should start immediately, not three years from now.

• State support is likely (although, again, I've seen no hard studies on this) one effective way of keeping real jobs. Many states and counties are simply running out of money at the moment. If the federal government can keep a police officer on the job, where he or she would otherwise be unemployed, that's a tangibly positive outcome.

The federal government should be intellectually honest that it can do little to actually create jobs (at least permanent ones). Instead, its role must be to continuously support businesses to feel confident enough to create jobs themselves. At the moment, that confidence is lacking.

The honest truth is that I don't know how to help a 55-year-old father of five from Lexington, Ky., who just lost his manufacturing job, find his next job. He's probably not going to get "retrained" by the government and find another manufacturing job easily. He's certainly not going to be first in line to get one of the exciting-sounding "green jobs." I don't think any politician -- Republican or Democrat -- has any idea of what to do to help this guy.

But there are a lot of people like this out there today -- too far along in their careers to restart, with too little money to retire.

This guy is realistically on his own to find his next job. He needs a government to help increase the safety net of services like food stamps to help, and one to help businesses across the country to feel more confident, but he doesn't need another stimulus program that the politicians congratulate themselves about which leads to nothing for him.

This post has been republished from The Street.

What Is The True Unemployment Number?

The US Bureau of Labor reports an unchanged unemployment rate of 10% for December, but just how accurate is this number? When we add the pushed-aside category of unemployed people who have given up looking for work and the involuntary part-time workers to the equation we arrive at a much more realistic figure, and it’s not a pretty picture. See the following post from Expected Returns.

This is a very weak unemployment report as every important qualitative measure of unemployment showed further weakness. There is no recovery based on the data. From the Bureau of Labor Statistics:

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

This is the official line. Let's take at a look at some of the statistical manipulation needed to come up with a 10% headline unemployment number.

Civilian Labor Force

The civilian labor force participation rate fell to 64.6 percent in December. The employment-population ratio declined to 58.2 percent. (See table A-1.) The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was about unchanged at 9.2 million in December and has been relatively flat since March. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

The civilian labor force participation rate continues on its remarkable and historic downward trajectory. In order to appreciate the significance of such a contraction, it is critical to understand what the civilian labor force participation rate represents.

The civilian labor force participation rate represents the percentage of eligible, working-age individuals actively seeking work- which means looking for work in the past 4 weeks. If you haven't looked for work in the past 4 weeks, you are no longer considered unemployed in the government's land of make-believe.

Now, let's try to get a sense of how bad the unemployment situation is in what the average person would call reality, and not the land of government statistical make-believe. Curious minds will be asking why the civilian labor participation rate is declining at such a rapid pace. The answer lies in the protracted nature of the current economic downturn. From the BLS:

Among the unemployed, the number of long-term unemployed (those jobless for 27 weeks and over) continued to trend up, reaching 6.1 million. In December, 4 in 10 unemployed workers were jobless for 27 weeks or longer.

It's pretty clear that when 4 out of 10 individuals are unemployed for more than 6 months, we are talking about an environment where employers are simply not hiring. When employers stop hiring, people give up looking for work, which means they are no longer part of the civilian labor force. This individual is not considered by the government as unemployed, but as a 'marginally attached worker'.

About 2.5 million persons were marginally attached to the labor force in December, an increase of 578,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Below is a graph of 'discouraged workers', a subset of marginally attached workers, which represents those who want work, but are not actively seeking work due to perceived weak economic conditions. I like to think of the 'discouraged worker' as an indicator of current hiring conditions. If employers are really hiring, the discouraged worker should disappear rather quickly; instead we are experiencing a continued and relentless upward trend in this category of worker.


True Unemployment Rate

I think most of us can agree that the 2.8 million 'marginally attached' workers are in fact, unemployed. If we add the 2.8 million marginally attached workers to the labor force and consider them as unemployed, we get a 11.6% unemployment rate.

Now let's incorporate what we know about marginally attached workers and the civilian labor force to come to a truer unemployment rate. Let's assume for a second that the labor participation rate is at the 67% level we saw in the beginning of the decade and see the effect this has on the unemployment rate.

This will require some simple mathematics.

The current labor force is 236,933,000. An increase from the current 64.6% labor force participation rate to 67% would be met by an attendant rise in labor participants from 153,059,000 to 158,745,000. So about 5.7 million people would be added to the labor force. If we assume the labor force participation rate declined because of an increase in marginally attached workers (unemployed for less than 12 months) and other forgotten individuals (unemployed for more than 12 months), we come up with an effective unemployment rate of 13.2% .

So, the true unemployment rate -which I define (as I think most would) as ALL people who want work but just can't find it- probably lies somewhere between 11.6% and 13.2%. If you consider individuals working part-time for economic reasons as unemployed, you get an unemployment rate north of 17.4%.

In short, the unemployment situation is a lot worse than government statistics would suggest, and this weakness will eventually be reflected in our economy.

This post has been republished from Moses Kim's blog, Expected Returns.

Many States Running Out Of Unemployment Funds

25 states have already run out of money for unemployment benefits and many more states are expected to follow in the next couple of years. With a growing number of Americans staying unemployed for more than 26 weeks, the costs to the government will continue to rise. See the following article from Expected Returns.

The ongoing recession has resulted in elevated levels of unemployment, and a dramatic increase in the extension of unemployment benefits- which is proving to be a drain on the budgets of states. There will eventually come a point where states can no longer function without draconian cuts to services. From the Washington Post, Unemployment funds going 'absolutely broke':

The recession's jobless toll is draining unemployment-compensation funds so fast that according to federal projections, 40 state programs will go broke within two years and need $90 billion in loans to keep issuing the benefit checks.

The shortfalls are putting pressure on governments to either raise taxes or shrink the aid payments.

Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps. By 2011, according to Department of Labor estimates, 40 state funds will have been emptied by the jobless tsunami.

Undoubtedly these projections are overly optimistic. Lets just take California as an example. In the 5 months of this budget year, California is already running $1 billion dollars behind already dire budget projections. Furthermore, tax revenues in November were 12% below estimates. Our economy simply will not recover unless California recovers as well.

Below I have included a chart showing the Employment to Population ratio over the past 10 years. This chart helps to explain why economic conditions are deteriorating at the same time that the unemployment rate is falling. The Employment to Population ratio captures unemployed persons that may not be calculated in the "official" unemployment rate for whatever reason, and therefore, gives a more objective and fuller view of the unemployment picture. The chart below makes it plain that people are relying on the local and federal government to hand them checks.

Unemployment benefits are funded by the payroll tax on employers that is collected at a rate that is supposed to keep the funds solvent. Firms that fire lots of people are supposed to pay higher rates. The federal government pays for administrative costs, and in a recession, it pays for the extension of unemployment benefits beyond 26 weeks. But over the years, the drive to minimize state taxes on employers has reduced the funds to unsustainable levels.

Can the federal government expect a reprieve in the near future from paying extended unemployment benefits to Americans? From the graph below, which shows the number of Americans unemployed for 27 weeks or longer, you can see that the federal government is going to be distributing many more checks to Americans.



States are following our federal government on the road to bankruptcy. Exactly how long can the government continue to hand out checks to people when they facing solvency issues themself? We will soon find out.

This post has been republished from Moses Kim's blog, Expected Returns.

November's Jobs Report In Perspective

Tim Iacono puts the November jobs report into perspective by looking back at the past two recessions. In 1991 and 2001, the first positive nonfarm payrolls number was followed by an extended decline in jobs. See the following post from The Mess That Greenspan Made.

With yesterday's labor report showing a decline of 11,000 in nonfarm payrolls and with upward revisions of more than 150,000 to the payrolls data from prior months, some people are, understandably, thinking that the unemployment rate might soon be going down.

A natural question that some might be asking this weekend is, "Based on the experience of the last two 'jobless recoveries', when might the jobless rate be expected to fall"?

Well, if past is precedent, the news isn't good.

After the last recession in 2001, nonfarm payrolls first produced a positive number in June of 2002 but, from that time on, the unemployment rate rose for a full 12 months, from 5.8 percent to a peak of 6.3 percent in 2003.

The peak in the jobless rate came at around the same time that nonfarm payrolls posted their last decline for the cycle, a loss of 42,000 in July.

Contrary to what some might believe, once nonfarm payrolls produce a positive number, they don't just keep climbing. In fact, back in 2002 and 2003, from the time of that first plus sign in front of the payrolls number until the last minus sign one year later, there was a net decline of 506,000 jobs.

The jobs picture wasn't much better after the 1990-1991 recession.

After the first post-recession payrolls increase in June of 1991, job growth was much steadier than after the 2001 recession but, here too, the unemployment rate continued to rise for an entire year, in this case, by almost a full percentage point from 6.9 percent to 7.8 percent.

Based on the last two recessions, we're still more than a year away from a sustained decline in the jobless rate.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

The Rare Occurrence Of The Jobless Recovery

Although in the past, peaks in unemployment emerged shortly after the end of economic recessions, this will not be the case for the current recession. This time, it looks like unemployment will not reach its peak for a while and the labor market will take much longer than usual to recover. See the following post from The Mess That Greenspan Made.
Writing in this morning's WSJ Ahead of the Tape column($), Mark Gongloff observes that "jobless recoveries" are a relatively new development.

The time-worn Wall Street gospel is that employment is a lagging indicator, but that isn't always so. It has only lagged significantly in the recoveries that followed the past two recessions.

In the eight recessions between World War II and 1982, payrolls bottomed and unemployment peaked, on average, less than one and two months, respectively, after the recessions ended.

Assuming, as most economists do, that the latest recession technically ended in June 2009, this recovery already is looking jobless.
...
Economists, on average, expect unemployment to peak in February 2010 -- eight months after the recession's assumed end. Even that forecast might be optimistic.

Yes, that's a typo in the graphic above (something that seems to happen quite a bit these days). It should say "Nov. 2001" as the end date for the last recession.

In chart form, the situation is as shown below via the Kansas City Federal Reserve.

Those sharp declines in unemployment following all recessions right up through the 1982 downturn represent an economy that is quite different than the one we have today.

Naturally, the differences were viewed as a good thing during the last two recessions when unemployment peaked at relatively low levels.

Now that we're challenging the early-1980s peak in unemployment with a return trip to lower levels of joblessness likely to come at a sluggish pace, these differences are taking on a whole new connotation.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

The Case For A Jobless Recovery

Even as some indicators point to an economic upturn, the employment sector has faltered. Without job opportunities to accompany the positive forecasts, intervention may be needed to prevent a long and painful recovery. The following post from Economist's View discusses the mounting evidence that a jobless recovery will take place.
Each year, Tim Duy organizes the Oregon Economic Forum, and this year he invited David Altig of the Atlanta Fed to talk about monetary policy. I'll be discussing fiscal policy, and one of the questions I'll address is whether more stimulus is needed. The poor condition of job markets will be a key part of that discussion, and this post of David's at macroblog provides additional evidence that the odds of a jobless recovery are increasing:

The growing case for a jobless recovery, by David Altig: The Wall Street Journal repeats the unhappy news:

"Companies across the economy are holding off on hiring even as the profit outlook improves, amid economic uncertainty and their own success at raising productivity in rough waters.

"Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment, even though the government is expected to report next week that the economy grew in the third quarter, after four quarters of contraction."

I'd like to be able to contradict what most forecasters expect, but we at the Atlanta Fed have been building the case for a similar outcome on macroblog. Here are few salient points from previous posts.

Job opportunities are scarce. (Oct. 14, 2009)

"At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low."

This development could, of course, turn around as business activity picks up, but there is more than a little evidence that some structural impediments are afoot.

Job losses have been disproportionately concentrated in small businesses. (Oct. 6, 2009)

As Melinda Pitts pointed out a few weeks back, businesses with fewer than 50 employees account for about one third of net employment gains in expansions. They have accounted for about 45 percent of job losses since the beginning of this recession. Given that these are the types of businesses most likely to be dependent on bank lending—and given that bank lending does not appear poised for a rapid return to being robust—the prognosis for an employment recovery in these businesses is a question mark.

The share of workers reporting that they have been involuntarily cut back to part-time is at a recorded high. (Aug. 14, 2009)

"… the increase in people reporting that they are involuntarily working part-time rather than full-time is considerably higher in this recession than in past recessions. Although the increase in these workers has moderated some since the spring of this year, the number of people in the category of working part-time for economic reasons remains at 8.8 million, well above the level of past contractions in both absolute and relative terms."

One potential implication of this fact is that firms probably have the capacity to expand production without hiring new workers (or increasing worker productivity). All these firms have to do is give more hours to existing workers, who have indicated they would be plenty eager to have them. Good for them—and good for GDP growth—but not much help on the employment front.

Here is one additional concern that we have not previously emphasized.

The percentage of employee separations labeled permanent is at a recorded high.

Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.

The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:




Of course, none of this is proof positive that we are in for a "jobless recovery," but, to me, the odds appear to be increasing.

I wish I would have had the last graph when I made up the slides (pdf) for the presentation.
This post has been republished from Mark Thoma's blog, Economist's View.

Too Much Competition For Job Openings

The economy continues to destroy jobs at a much faster pace than it is creating jobs. The ratio of unemployed workers to job openings has skyrocketed by over 200% since 2007, which means greater competition for fewer jobs and longer periods of unemployment. See the following post from Economist's View.

The ratio of the number of unemployed to the number of job openings suggests that the current weakness in labor markets is likely to persist:

A look at another job market number, Macroblog: ...At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low. This is an especially significant issue given the large number of people who are looking for work. The ratio of the number of unemployed to the number of job openings was greater than 6 in August. In contrast, that ratio was under 1.5 in 2007 and previously peaked at 2.8 in mid-2003, suggesting that finding a job right now is extremely difficult...



The quit rate moved back down to its record low of 1.3 percent, as relatively few people want to leave a job voluntarily in the face of such a weak labor market. At the same time, the rate of involuntary separations moved up from 1.6 percent to 1.8 percent, not far below the peak of 1.9 percent in April.

The low probability of finding a job has also caused the average amount of time spent unemployed to rise substantially. ...

Labor markets need more help. This article has been republished from Mark Thoma's blog, Economist's View.