[OPE] All Along the Watchtower (Macroeconomic Outlook)

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Fri Apr 10 2009 - 23:33:36 EDT

Mark Zandi, chief economist at Moody's Economy.com, says:

... the rate of job losses will need to slow soon if the recession is approaching its end. If the nation continues to shed jobs at a rate of 600,000 a month or more, it will overwhelm the improvements in retail sales, the housing market, and business investments. http://www.boston.com/business/articles/2009/04/10/positive_signs_stir_hopes_economy_is_bottoming_out/?page=2 "The severity of the downturn is evident in the job market, while improved financial markets suggest the economy is no longer in free fall. Beyond that, the recession has hit home for many, if not most, Americans. Those who have not lost their jobs or had their hours or wages cut likely have friends or family members who have suffered these misfortunes. Employment rolls have shrunk by more than 5 million jobs since peaking at the end of 2007. Some 25 million workers, over 15% of the workforce, are either unemployed or underemployed. The only industries adding to payrolls are healthcare, utilities and the federal government, and not one of the more than 380 metropolitan areas in the country is experiencing substantive job growth. (...) The downturn that began in December 2007 is expected to wind down by the end of 2009. Peak to trough, real U.S. GDP will decline nearly 4%, and employment will fall by 7.5 million jobs. The unemployment rate is expected to peak at nearly 10% in the spring of 2010. http://www.economy.com/dismal/article_free.asp?cid=114080&src=mark-zandi

I think personally however the US conventional unemployment rate of the labour force will go to 10%, or, quite possibly, in excess of 10% as I've said before. Other things being equal, if the job losses continued at the same pace then you get about 13% unemployment at the end of 2009. The US govt is also intervening, reducing that figure somewhat, but they're very unlikely to create 4m+ jobs in half a year's time. Basically the avalanche of job losses outpaces anything the US govt can throw at it.

Richard Berner at Morgan Stanley explains the underlying economics point quite well:

Classic gauges of depth and breadth support our view that the recession has further to run and that the coming recovery [i.e. in 2010] will be modest. (...) Deep downturns often promote V-shaped recoveries because they constrain spending, thus building up 'pent-up' demand. This time, we think that the ongoing credit crunch will stymie pent-up demand (...) in the credit crunch, lenders are demanding more collateral (bigger downpayments). (...) sales in the year ended in January tumbled by more than 8%, and inventories have declined by only 2%. Aggressive production cuts and plunging imports may finally be reducing the imbalance between sales and stocks. Unfortunately, in the current downturn, we think that the ongoing credit crunch will delay both sales and thus hiring. (...) the deeper the recession, the more severe the decline in operating rates and profit margins, which bodes ill for pricing power, capital spending and hiring. Industrial operating rates have already plummeted to record lows of 66.8% in manufacturing, and we think they will bottom at 62%. Margins, in our view, seem likely to fall all the way back to 2001 levels. The time-honored relationship between those gauges and capital spending suggests that declines will continue in investment for most of 2009. (...) This time virtually no sector of the economy is immune from the credit crunch, so it is difficult to find any cushions of demand. Likewise, the current global recession means that neither the US nor its trading partners can rely on each other for export demand. As evidence, despite a seven-year decline in the dollar, real US goods exports have been crushed in this recession, plummeting at a 43% annual rate in the last six months, and there are only faint signs of stability in the ISM export orders index. (...) As their net worth declines and looks increasingly uncertain, consumers may save much of coming tax cuts. Moreover, tight credit may limit the 'multiplier' effects of spending programs. http://www.morganstanley.com/views/gef/index.html

Precisely because there are no "cushions of demand", a fiscal stimulus is the only thing left to do.

A Forex site argues that:

Recent employment data has shown indications of stabilization in the pace of job destruction. (...) Given that the rest of the economy remains weak, we expect significant job losses to continue but not to accelerate. http://www.fxstreet.com/fundamental/analysis-reports/economic-observatory/2009-04-06.html

But even if the rate at which jobs are lost doesn't "accelerate" as they put it (i.e. no cumulative "multiplier effect"), then, if it just continues to go the way it's going in the US, you have a net loss of another 4.5 million+ jobs there by year-end. Probably the total net loss will not be quite as high as that, because of government intervention, but even supposing the real total jobs lost was only half, or even somewhat less than half, of that number, you have already got your 10% unemployment rate. The expectation is that job losses will somehow slow.

The OECD however states bluntly: "The collapse of world trade growth cannot be explained by past relationships" http://www.oecd.org/dataoecd/60/32/42438064.pdf

What this means is, that econometric extrapolations from past trends will be inaccurate, because the situation now is significantly different from the past recession, specifically because of the current debt overload, the very rapid worldwide financial reactions, the credit crunch and the very rapid destruction of many trillions of dollars of asset values worldwide. Throughout the past 1.5 years, all the key macroeconomic indicators have consistently been revised in a more negative, more pessimistic sense; the past is not a good predictor of the current situation anymore, you have to factor in the novelties of the situation.

The labor market situation in Europe is very similar to the US; close to half a million jobs net are vanishing each month. In Japan, between 200,000 to a quarter million jobs are now disappearing every month.

Once you have an unemployment level of 10%+, then it would take another five years - at the very least - to bring it down again to half that level, but I think that won't happen, and thus we will be stuck with a permanently higher unemployment rate for the foreseeable future. Once inflation starts rising, out of the monetization of debt, the NAIRU will be established at a permanently higher level.


ope mailing list
Received on Fri Apr 10 23:35:39 2009

This archive was generated by hypermail 2.1.8 : Tue May 12 2009 - 15:26:04 EDT