Notice the job growth has been extremely weak, especially compared to the last two expansions. That leads to an important question: assuming an economic slowdown, how bad will employment become?
"If payrolls are leaner than they usually are when the economy softens, then companies may not have either the need or the scope to lay off workers en masse," said Goldman Sachs economist Ed McKelvey in a recent note.
December's unemployment rate ticked up to 5% from 4.7% in November, but economists disagree on whether it will get worse, and to what degree. David Rosenberg, an economist at Merrill Lynch, said in a note Tuesday that he expects job losses this year to total 2.5 million, similar to cuts in the last recession, and for the jobless rate to hit 5.75% by year end.
Others are more sanguine. "I'm not betting on a string of monthly job losses," said Richard DeKaser, chief economist at National City Corp. in Cleveland. He predicts the jobless rate will rise to 5.25% in the first half of the year and expects the weakest sectors to continue to be manufacturing, construction and financial services.
Rosenberg -- who is a top-notch economist and someone who I have tremendous respect for -- is arguing for a more "traditional" lay-off scenario. From his perspective, he thinks that employers will slash and burn their payrolls to save money.
But consider the weakness of the job picture for this expansion. When you look at the chart from the St. Louis Fed, notice employers delayed hiring during this expansion far longer than before. In addition, notice the year-over-year figure topped out at a lower rate than the previous two expansions, indicating that even when the economy was rolling along pretty well, employers were still cautious about hiring. Instead, they made do with less. Here is a chart of the year-over-year change in multifactor productivity from the St. Louis Fed:
.....While a recession could change their minds, employers are reluctant to institute mass layoffs, which can result in the loss of skilled workers who are costly to replace when the economy improves, said John Silvia, chief economist at Wachovia Bank. Rather, many have put the brakes on hiring new workers in some or all of their operations. "A lot of firms have simply said the risks are too great to add workers," he said.
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"If payrolls are leaner than they usually are when the economy softens, then companies may not have either the need or the scope to lay off workers en masse," said Goldman Sachs economist Ed McKelvey in a recent note.
Let me throw the following hypothesis out: employers were far more reluctant to hire this expansion. Instead, they hired less but increased their productivity more. As a result, their business models are now wedded to a higher-productivity/lower workers total model. This means businesses can't cut jobs like they would in previous expansions because they would lose valuable employees. In addition, this would negatively impact the increased productivity of their respective businesses, which would have a ripple effect through their respective business.
It's still a hypothesis, but an interesting one.
12 comments:
Dept. of you couldn't make it up
Something that I was thinking about in terms of the employment picture: how do the boomers fit into this? They are hitting retirement age right now. So, we'll see some of these people retiring naturally, and probably where cuts are needed, some pressed into early retirement. If that's true, we may see little in terms of a decline in employment in this recession.
I agree, and it links in with a question I had intended on asking the inimitable Bonddad.
First, I would suspect, with such low job creation over the last few years, and stagnant wage increase, the middle class and the lower class is hit the least by this downturn. After all, most lower income, and many middle income don't own any stock per say. If they work for a large corporation like GM, they'd have a pension that might be losing money, but that's money they don't see anyway. So the only way to "feel the burn" would be by losing your job, and attempting to get a new one while the market is flooded with similarly dispossessed workers. That being said, most of the layoffs announced thus far has been at the banks. Not at the construction sites, and retail establishments. And while sales were down this year, they were hardly devastating, so clearly people are still buying. So I think that your hypothesis has fairly good grounds. An underhired, and overstrained work force is too valuable to fire. When the productivity per worker is as high as it is, the loss of even one worker significantly impacts output. That being said, I think Rosenberg has a point: considering the amount of ink and air time spilled on this recession, it seems highly likely to me that many companies will slash and burn, until they learn their mistake.
Now here's my question. I watched the Senate Finance Committee on C-Span the other night. The three plans they were discussing for mitigating the recession were a plan of getting money out to the people who need it most (lowest income), tax rebates for everybody, and business stimulus concessions. This dovetails with my point earlier. I don't think the lowest class has even begun to feel the recession yet. Moreover, the autocompanies have been doing large scale layoffs routinely for the past three years, and nobody seems to have complained--no emergency economic stimulus package. I like the idea of money going to where it's needed most, and to where it's most likely to get spent quickly, and recycled back into the economy--but I can't help but feel that this fervor is caused by and anticipated as a windfall for the people who were hurt most by it. Namely, the top 3%. So please, explain to me why now? Wages are still pitifully low. Healthcare is still out of reach, and most Americans will still be lacerated with debt--what is the point of this?!
In response to hammclov, it seems to me that the lower and middle class folks are already feeling the pinch. The fallout in the markets is all ultimately connected back to the mortgage crisis. That might cause a lot of problems for banks but it's also causing a lot of problems on the bottom too because it's harder to get financing for homes. Home purchases and refinancing have been a huge driver of the economy.
Basically what we see is three kinds of problems related to housing. First of all, a number of people are being forced to sell their homes at a loss, or certainly without much gain. Second, some are able to keep their house but without the rising prices, they can't refinance to get more money, so the have less money to spend. Third, there are people who are being foreclosed on, filing bankruptcy, and ruining their credit.
In all of those three cases you end up in a situation where consumers have less ability to spend money. To maintain their existing lifestyles they may have gone into some credit card debt as well, which is tying them up all the more. So the result is less consumer spending more broadly.
That lack of disposable income results in hurting a lot of people off of wall street. Less people able to buy iPods, cellphones, dinners out, etc, means that the overall economy turns south. That overall decline in demand, necessitates a decline in supply, and thus you get into layoffs and other cut backs by businesses.
The reality is, I think, and I've seen this said elsewhere, is that a stimulus package is a bad idea. It'll inevitably turn into a big pork fest, and it will probably not solve any problems (and just ring up more debt). Handing a few hundred bucks to a lower class worker, is probably just going to end up going into paying down some credit cards. Handing it to an upper class investor will just end up going into buying gold or bonds. That's not really going to create a stimulus.
Frankly, the smart way to do it would be to invest in long term infrastructure projects. This will create employment building bridges, laying fiber optic cable, building schools, etc. The resulting investment won't do a lot to solve today's economic problems, but it will lay the ground work for growth in 20 years time (as it did in the 60's with the payoff from the New Deal coming through after the debts of war were paid off).
D'oh, why should the unemployment numbers spike when most of the marginal workers are contract employees anyway? The firms just terminate the contract. The individual involved isn't filing unemployment when their "business" goes out of existence. They just don't have any income, which makes a little less rosy for the macroeconomic situation. The BLS won't be catching up to what happens with accelerated job destruction until they next redo the model. This is just the mirror image of how slowly they reacted to the issue of new small business creation back in the 1990s.
I don't believe the employment downturn is just in the financial and manufacturing industries. I think that the information industry is now being outsourced to other countries by multinational corporations in a big way. The internet has enabled the IT industry to send technical jobs to low wage countries similar to what the auto industry and manufacturing did in the past.
I think that the information industry is now being outsourced to other countries by multinational corporations in a big way.
It depends. On the support and maintenance side of things, there definitely has been a lot of that. But in terms of software development, consulting, etc, there's arguably a shortage of people. I mean it does depend on the skillsets, etc, but it's not universal.
Don't get me wrong, being in the industry, I worry about that trend. But I have seen enough evidence to suggest that outsourcing is not the panacea that some expect it to be.
Gentlemen, it is my impression that if the lower classes don't seem to be getting as much of a negative impact, it is because they never got much of a "recovery" from the last recession.
I suggest that the lower and lower Middel Class never did fully recover from the 2001 recession.
BTW, excellent topic, Mr Stewart!
Thanks for your reply Sterno. So I understand about the foreclosure's affecting the lower and middle incomes. It's hard to see that where I live because nobody owns their own home. I guess my follow up to that--particularly as a member of the generation that starts out life with a crippling college debt--would be, is the possibility of debt relief a probable form of economic stimulus?
Hammclov, actually there was a proposal put forth by... I think it was Bernie Sanders and maybe Ted Kennedy that's not intended directly as economic stimulus that addresses that to an extent. Basically what it would do, and I forget the exact details, but you would be able to work in various public sector jobs like school teacher, or health clinics or that sort of thing, and after a few years (I forget the number) the government would pay off your debt.
This has a few obvious benefits of course. It clears out that debt, it gets more skilled people into needed jobs, and it gives those people solid work experience.
I think though that yeah, the big problem we have right now is that there's a lot of debt in the system and we need to clear it out in some manner if we're ever going to have much progress. Combining public service with debt elimination seems like a smart way to go, IMHO.
Arent people also feeling the heat in terms of stagnant wages, coupled with higher prices?
I'm speaking of anything oil related,obviously, as well as enormous health care costs.
Speaking strictly for where I work now, I think you're right. It's a small company, and its financial problems arose from an office employee running the books who ripped off the company to the tune of half a million--an awful lot for us. That was the first time the owner had to lay anybody off; and he's never fully rehired.
You could say he is reaping the benefits of higher productivity among existing employees. He may be planning to hire, I don't know, but if he can get the work done with the employees he has, why should he hire? Especially considering the rocky state of the U.S. economy.
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