Recession, Recovery, and Unemployment: Will 10% be the New Norm?

With the recession all but officially dead in mid–September, the understandably circumspect Federal Reserve Chairman Ben Bernanke went far enough out on a limb to describe it as “very likely over,” attention has turned in earnest to the shape and speed of the recovery. And lately anyway, there has been plenty of good news, or less bad news, on almost every economic and financial front: gross domestic product (GDP) estimates, industrial output, productivity, housing prices and, most noticeably, the stock market which continues to plow ahead despite weekly pronouncements that the rebound has run its course or should at the very least take a breather. The glaring exception, however, is the one area that is most keenly felt by Americans at the ground level, employment. As President Obama told David Letterman, of all people, this week, “Unemployment is going to be a big problem for at least another year.”

To get a better idea of the state of unemployment, I’m going to consider first, the extent to which the unemployment rate is intertwined with America’s economic growth; second, the latest reports from the employment front lines, little of it cheering; and lastly, what’s next, which almost everyone agrees is a visit to double-digit territory for the first time since the unemployment rate reached 10.1% in June 1983.

Not 1933 all over again

When the recession began in December 2007, and more so when it shifted into high gear the following September with the collapse of Lehman Brothers, the bears and Cassandras of the financial world started invoking comparisons with the Great Depression, particularly when it came to the rising unemployment rate. Let’s make one thing clear, as bad as this recession has been and as painful as it has made life for millions of Americans, it’s nowhere near the scale of joblessness in 1933 when 25% of Americans were out of work. According to Department of Labor statistics, the rate of unemployment was 4.9% on December 31, 2007, when the recession began and 6.2% post-Lehman; grim news, but hardly record-breaking. The rate hit 9.7% in August and, all told, about 6.7 million jobs have now been lost during the recession. And it’s worth noting, as The Wall Street Journal did recently, that the stimulus package was pushed through with a pledge of keeping the jobless rate below 8%. This will almost certainly be fodder for Republicans come the mid-term elections, especially as there’s an ongoing debate as to how many jobs have been created by the stimulus money, let alone how to measure the total (the president recently claimed about 1.5 million jobs had been saved so far).

While the similarity to the Great Depression can be cast aside when it comes to unemployment, there are salient points of comparison between it and the recent recession as Christina D. Romer, the current chair of President Obama’s Council of Economic Advisers, told the Brookings Institute earlier this year:

As was the case in 1933, our consumers and businesses are in no mood to spend or invest; our financial institutions are severely strained and hesitant to lend; short-term interest rates are effectively zero, leaving little room for conventional monetary policy; and world demand provides little hope for lifting the economy.

Indeed, the problem is not so much the extent of unemployment but its inextricable link to America’s economy. Our yardstick of economic growth (and recession) is GDP and, as the chart illustrates, the importance of consumer spending has steadily risen until it now accounts for a whopping 70% of total GDP (the remaining 30% is investment and government spending plus the value of exports less the values of imports). (Fig. 1.) For the record, U.S. GDP was an estimated $14.26 trillion in 2008.

The vicious cycle

So here’s the problem. When sales fall businesses lay off workers, the worst case, or don’t hire new ones, the best case, comparatively speaking. When people lose their jobs or are concerned about holding onto their jobs, they cut back on their spending and borrowing, low interest rates notwithstanding. And if people aren’t buying, businesses don’t produce and sell as much (while at the same time they’re trying to improve efficiency, cut costs and reduce inventories) and are thus firing and not hiring. If businesses are firing and not hiring, unemployment rises. And if people are losing their jobs and not spending, GDP falls. In sum, businesses won’t hire until consumers start spending, and consumers won’t start spending until businesses hire. This is what is known in the trade as a vicious cycle.

This is borne out by tracking year-to-year personal consumption expenditures, which, not surprisingly, move in the opposite direction to the rate of unemployment. (Fig. 2.) At the end of July, the last month for which figures are available, expenditures were down 0.8%. In fact, they have not been up since the very modest rise of 0.5% in June 2008. In July 2007, by comparison, expenditures were up 2.4%. And given the statistical precedents, it’s unlikely that spending will rebound until hiring does.

The latest news, most of it grim

So where are we now? Sifting through the economic data of the past month or so, the story is far from upbeat. Retail spending, for instance, is indeed down though some felt the government’s recent “cash for clunkers” rebate program might have diverted a large chunk of money ticketed for discretionary spending, almost $3 billion, to car dealers. (Fig. 3.)

And while the nation continues to shed fewer jobs, 545,000 at last report, analysts say that initial jobless claims of 300,000 to 350,000 a week is consistent with a healthy economy. New claims last fell below 300,000 in early 2007. As points of reference at both ends of the scale, the recent high for losses was 741,000 in January 2009 and the last month when there was job growth was December 2007 when it rose by 120,000. Furthermore, there is another less noticed category that the Labor Department includes in its monthly estimates called “discouraged workers” or people who have at one time looked for work this year but had not done so in the previous month. That number rose to 780,000 in August compared to 349,000 in November 2007, before the recession. And there’s yet another group labeled “marginally attached to the labor force” which includes discouraged workers, as well as those who have stopped working for health reasons or because they went back to school. If the August unemployment rate had included all of these people, it would have been 11% rather than 9.7%. And this does not even include the number of jobs, which some estimate at 2.4 million, that would have had to been added to keep pace with new people entering the workforce but were not.

For those out of work, one-third have now been jobless for more than six months, the highest record for long-term unemployment since the post-World War II recession. (Fig. 4.) Worse still, there are now nearly six workers available for every job opening, up from 1.7 at the onset of the recession.

In addition, the Labor Department reported that there was a record low of 2.4 million job openings in July, the fewest since the department started keeping track in 2000 and half of the high of 4.8 million in mid-2007. The Conference Board’s Employment Trends Index (ETI) was down 0.1 points to 88.1 in August, its lowest level since January 1994. Payroll has plunged a precipitous 5%, a record by a wide margin, from its peak 19 months ago.

Teenagers, meanwhile, are out of work in record numbers, 25.5% in August, the highest level since the government began tracking them in 1948. And that number is compounded by the fact that layoffs and stock market losses have increased the reliance of parents on their kids to help pay for college.

In New York City, reflecting Wall Street’s travails, the jobless rate reached 10.3% in August, a 16-year high. Until July, when it hit 9.5%, the rate in New York City had been below the national figure for more than 18 months. California’s jobless rate in August, meanwhile, hit 12.2%, a 70-year high.

The international outlook is not much better, according to the Organization for Economic Cooperation and Development (OECD), which recently reported that jobless rates could continue past 2010 unless government programs for the unemployed are “refined.” The OECD said that the unemployment rate for its 30 member countries would reach nearly 10% by the end of 2010, with youth, the unskilled, immigrants and temporary workers bearing the brunt. The OECD’s estimates range from a high of 20% for Spain to 10% for the United States and 6% for Japan.

And the latest bad news on the home front came this Tuesday when the House extended unemployment benefits for 24 states by 13 weeks, the fourth time benefits have been extended since the recession began. Total federal assistance for states that have had an unemployment rate of 8.5% or more for three months in a row is now 46 weeks, a record. The average weekly benefit? All of $300 dollars (though it is usually supplemented by a variety of state programs). That’s a lot of bad news to digest, but what may be most disturbing of all is the fact that GDP growth is expected to rebound from -1.0% in the second quarter of this year all the way to, depending on your forecaster, 3% to 4% in the third and fourth quarters. While at the same time almost everyone including the president, who hardly wants to be the bearer of further grim news, predicts that unemployment will rise to 10% by year-end and perhaps reach 11% in 2010. The unemployment rate is a “lagging indicator,” meaning that it takes longer to come around as businesses cautiously recommence hiring, but these forecasts seem to take the lag to a new level and beg the question of how far GDP can bounce back, and stay there, without consumer spending. As a result, the debate in some quarters is no longer when the rate will fall back to where it was before the recession began, 4.7% in November 2007, but if it will ever do so.

Where are we headed? Another “jobless recovery”?

All of this has led, inevitably, to talk of a “jobless recovery,” during which the economy bounces back without an uptick in hiring, as was the case after the last recession in 2001 when payrolls continued to decline for another two years. This time around, the losses might be exacerbated by the fact that companies have begun to replace former employees with new technologies or moved jobs overseas.

Indeed, it may take years before the job market bounces back. With less borrowing power, consumers will curb spending. Businesses will remain cautious about ramping up. And once the stimulus is spent, there could be another contraction. In some cases, further job loss might lead to more stimulus, but that’s going to be a very tough sell with the health care bill looming and forecasts for the ballooning federal deficit.

For the optimists among us, some have opined that when the recession gathered a head of steam and companies became nervous, they actually let go of more people than they had to before they had to. As a result, productivity has been strong and earnings bounced back in the second quarter, so those businesses may hire back sooner than expected.

But the last word for now comes from those in the trenches, the very people who do the hiring. A recent survey of 657 finance executives conducted by Duke University’s Fuqua School of Business and CFO Magazine found that they were far more optimistic about their companies’ prospects than they were in May. Despite that optimism, 54% said they didn’t expect their companies to return to pre-recession staffing level before 2012 and 25% said that staffing levels may never fully rebound. Should that happen, 10% may indeed become the new norm, and only time will tell us what the impact on GDP growth, and our economy, will be. Stay tuned.