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Tuesday, July 28, 2009

Charts and Persepctive on Employment

Plus "The End of the End of the Recession from Zero Hedge"

We did get the web site in some order this past weekend. The charts on economic performance by president are more complete, and we'll go into those in a moment. The forecast charts are now in order on the forecast page. The whole tangled empire is nearly in order.

After the charts we will come through with the promised perspective from last Saturday's podcast, which was left on the cutting room floor.

We hope you like the deep sky blue. It may work.


Employment and Unemployment

At one time our baseline scenario for employment and unemployment was significantly below that of other economists as represented by the Philadelphia Fed's survey of professional economists and the quarterly projections of the Federal Reserve Open Market Committee. (Although you will notice, the actual data tracked our forecast quite well.) Beginning in March, 2009, the consensus has tracked us more closely.


The unemployment rate cannot help but reflect the deteriorating economy, and particularly the collapse of consumer spending and state and local government revenues. Business earnings are positive only if those businesses have been very aggressive in cutting their workforces. This means further weakness down the road. Similarly, positive news in the form of an increase in the personal savings rate means less spending and a reduction in employment and consequently a reduction in savings down the road as more and more unemployed individuals must tap their rainy day funds to meet current expenses.


Demand Side expected George W. Bush to come within one million of being the first president in postwar history to preside over an economy that produced no -- zero -- net new jobs. Six months after his watch ended, the feat was accomplished.

Employment growth will lead the economy's true recovery, regardless of when that recovery occurs. An aggressive jobs-first program will produce the best outcomes. Unfortunately, private sector job growth is going to lag for years to come, and the growth which does occur will reflect the weak bargaining position of workers. That is, both the numbers and incomes connected with private sector new employment will lag for some time.

We're currently at work, as we threaten from time to time, on a second edition of Demand Side, the book.

Economic Performance by Party of the President is basically chapter 4 of Demand Side, the book.

Increase in Employment by Year again displays the "missing teeth" during Republican years and general stability and strength during years of Democratic presidents. Notice the relatively weak showing of George W. Bush in employment growth does not translate clearly to the chart below, the unemployment rate. The reasons for this are ambiguous.

Unemployment Rate.

The most striking element in this chart is the regular step down in the unemployment rate when Democrats have been in the White House. Only during the immediate postwar transition and in the year 1980 has there been any meaningful break in this pattern of downward steps.

Also with the exception of Carter and the year 1980, the unemployment rate has been significantly lower in the last year of a Democratic administration than in the first.

By President

Comparing these two charts we see that strength in employment growth does not translate clearly into lower unemployment rates. This is due to weaknesses in the methodology for calculating the official unemployment rate, which continues to count workers if they move from full-time to part-time and which reduces the denominator -- the workforce -- by so-called discouraged workers and by others.

By Presidential Term

These two charts confirm the pattern we have seen of employment growth being strong under Democrats, but not translating clearly into the unemployment rate. We observe here that both measures undercount the effect of weak employment. When employment growth is strong, wages also tend to be stronger, and vice versa. Incomes are the major source of demand, and they are doubly weak in a weak labor market.

In a moment we'll get to the longer-term perspective. But we did want to draw your attention to the excellent piece out of Zero Hedge by Tyler Durden, a 72-page presentation entitled, The End of the End of the Recession.


(embedded at the end of this post)

Introduced in part by this:

This presentation has been prepared in collaboration with the terrific work of
David Rosenberg, Chief Economist & Strategist, Gluskin Sheff + Associates

We believe an aggressive “fact-finding” investigation into the true depths of the
recession is critical due to increased pressure by members of the Mainstream
Media and conflicted Investment Banks to present a myopic, unjustified opinion
Furthermore, opinions based on overoptimistic projections and “hope” are the
primary reason the Credit Bubble persisted as long as it did

If the general population and regulatory authorities had approached rating agencies
about the optimism quotient in their faulty models, it is likely that the current
correction would have been nowhere near as severe

As there is an all too real threat of a relapse into the same kind of optimistic zeal
and the resultant formation of yet another asset bubble, Zero Hedge is
presenting the factual side of the story

We demand that readers question any and all assumptions

and elsewhere

The U.S. Consumer

Consumer deleveraging continues unabated despite all efforts by the Fed
and the administration

New credit card issuance has plunged 38% year to date, and the average
limit on new credit cards has declined by 3%

In May consumer credit contracted by $3.3 billion, the fourth decline in a
row: the longest declining period since 1991

Since Lehman collapse, consumer credit (excluding mortgages) has
contracted by $53 billion: an 11.5% annual rate, a record decline

Weekly bank lending through June show further shrinkage

This is a highly deflationary development: all the government can do is
cushion the blow

Former IMF Chief Economist Ken Rogoff: “The kind of deleveraging we
need to see takes six or eight years … The retrenching of the U.S.
consumer is a huge

Now a different form of perspective. The focus of the intelligent these days is on how to get out of the current economic mess. Our suggestion is that we begin to look at where we're going, because we cannot get back to where we came from, even if we wanted to. So, yes, Let's fix the hole in the boat caused by running it onto the rocks. But once we've done that, let's not pretend the job is done, because nothing good is going to come from sitting here on the beach.

That said, and at the risk of displaying a little less than perfect foresight, we'd like to read from Demand Side, the book, First Edition. This is only two years ago.

The point we make here is that everything was not going swimmingly prior to the crash and that going back there is not only not going back to the normal, it is not going back to the healthy or the possible. Setting a new course is the only way to keep the old outcomes from coming back.

The economic decline of the United States (written 2007)

The United States is in advanced stages of losing its manufacturing base. It clings to doomed technologies. Its infrastructure is aging and decrepit. Both government and citizens subsist on debt and borrowing. While the U.S. remains the richest nation, the free market ideology that directs federal policy comes with a curiously contradictory price tag in the form of enormous public borrowing by the Free Marketeers who direct fiscal policy. This borrowing and the resulting debt is then cited as proof of the regrettable profligacy of government.

We have doubled our mortgage debt within the past six years. ( Dean Baker, Dangerous Trends: The Growth of Debt in the U.S. Economy, September 2004.) Our aging population enters retirement with its Social Security made fragile by decades of borrowing to float general government operations. The free market advocates who now call for low taxes and high deficits have hidden from us as much as possible the financial facts. Borrowing does not reduce taxes, only postpones them to be paid back with interest.

Much of our debt is held by foreign central banks or individuals. They have financed our homes and durable goods. They will not be satisfied with payment in currency. Money is simply the medium of exchange. They will want goods and services. What will we give them? Where is the industrial plant or development plan to repay our debts?

Health care demands a sixth of our output, twice the proportion of other industrial nations. War demands people, treasure and effort that cannot be used to address our other problems.

Huge borrowing also bids up the value of the dollar. American-made products priced in expensive dollars must then compete with the manufactures of other countries. Standard economic theory has no explanation for trade deficits of hundreds of billions per year for decades. The inflated dollar and the trade deficit are inextricably linked, and result from the use of the dollar as reserve currency. The implications for instability and potentially excruciating correction are enormous if it should return to its role as simply a medium of exchange. Will the Federal Reserve, the central bank of the US, allow the dollar to collapse? Or will it pursue in futility the strength of the currency at the expense of a collapse in the economy?

Meanwhile workers and productive industry absorb the costs. Median incomes have stagnated since 1980, and wages have actually declined in real terms. Health care, energy, housing and education have consumed more of the family’s budget. And this richest nation also boasts the greatest disparity between its rich and poor. (Joshua Karliner, The Corporate Planet, Sierra Club Press, 1997.)

There is a way for the US to become a productive power again and for its government and citizens to operate in the black. The country can again trade goods and services in balance, rather than support itself on delusion and borrowing. That way will certainly not be found by running behind the Corporate Oligarchy and hoping for crumbs. The technologies and consumption patterns will not be the same in a rational world, but will provide for a fully engaged workforce and rising global economy that can convert the daunting challenges into opportunities. The United States, or its Corporate Oligarchy, may not dominate others economically, politically, or militarily, but we can be more prosperous, more secure, and allow our planet to survive as home for us all.

The End of the End of the Recession

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