[Sixstrings]

$this->bbcode_second_pass_quote('', 'A') survey conducted by YouGov for the Economist magazine found that 5% of respondents had taken a furlough this year and 15% had accepted a pay cut (see The Recession and Pay: The Quiet Americans on page 33 of this week’s edition).

As wages deflate, workers are looking for ways to supplement their shrinking income base, for example, by moonlighting. Indeed, a poll undertaken by CareerBuilder.com and cited in the USA Today found that one in every ten Americans took on an extra job over the last year; another one in five said they intend to do so in the coming year. These numbers are double for the 45 to 54 year olds who now see early retirement, once around the corner, as an elusive concept.

Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the deflationary aftershocks that follow a post-bubble credit collapse typically last for 5 to 10 years. Businesses understand better than the typical Wall Street or Bay Street economist and strategist that everything from order books, to output, to staffing have to now be restructured to adequately reflect a permanently lower level of leverage in the economy.

Indeed, by our estimates, there is up to another $5 trillion of household debt that has to be eliminated in coming years and that process is going to require that consumers go on a semi-permanent spending diet. Companies see this, which is why they are not just downsizing their payroll, but have also cut the workweek to a record low of 33.1 hours. Fewer people are working and those that are still working have seen their hours dramatically cut this cycle.

Companies are finding other ways to save on the aggregate labour cost bill as well, which may be a factor reinforcing the uptrend in the personal savings rate (see more below). For example, a rapidly growing number of employers are now suspending contributions to worker 401(k) plans. According to a joint survey by CFO Research Services and Charles Schwab, nearly 25% of U.S. companies have either suspended their plans or are planning to do so (this is up from 2% at the turn of the year). Again, how we end up squeezing inflation out of the system when the labour market is clearly deflating wages and benefits for the 70% of the economy called the consumer is going to be interesting to watch.

The op-ed column by Bob Herbert in the Saturday New York Times really hit the nail on the head on this whole ‘green shoot’ issue — how can there be ‘green shoots’ when the labour market is deteriorating at such a rapid clip fully nine months after the Lehman collapse. The full brunt of the credit collapse may be behind us, but please, the other two shocks, namely deflating labour markets and deflating home prices, are very much still front and centre. For every job opening in the USA, there are more than five unemployed actively seeking work vying for those jobs. That is unprecedented and nearly double what we saw at the depths of the 2001 recession. The official ranks of the unemployed have doubled during this recession to 14 million and if you take into account all forms of labour market slack, the unofficial number is bordering on 30 million, another record. For those who still believe that we somehow managed to avoid an economic depression this cycle because of a 13% fiscal deficit/GDP and a pregnant Fed balance sheet, the Center for Labour Market Studies at Northeastern University estimates that the real unemployment now stands at 18.2%, which is actually higher than the posted rate at the end of the 1930s.

When the recovery does come, the record number of people that have been pushed into part-time work are going to see their hours go back up, which will be good for them, but not so good for the 100,000 - 150,000 folks that will be entering the labour force looking for work with futility. The unemployment rate is probably going to rise through 2010, which is going to pose a challenge for incumbents seeking re-election in the mid-term voting season. It may also prove to be a challenge for Ben Bernanke’s re-appointment chances this coming February.

As we said above, companies have permanently reduced the size of their operations with the knowledge of how much credit is going to be available to them in the future to survive because the financial sector is going to be operating under more supervision and regulation and leverage ratios, which means the funds available to support a given level of GDP is going to be measurably smaller than what we had become accustomed to during the secular credit expansion, which really began in the mid-1980s, only to turn parabolic during the ‘ownership society’ era of 2002 to 2007.

What makes this cycle “different” is that three-quarters of the workers that were fired over the last year were let go on a permanent, not a temporary basis. A record 53% of the unemployed today are workers who were displaced permanently — not just temporarily because of the vagaries of the traditional business cycle. This means that these jobs are not going to be coming back that quickly, if at all, when the economy does in fact begin to make the transition to the next expansion phase. In turn, this implies that any expansion phase is going to be extremely fragile and susceptible to periodic setbacks. There may well be job growth in the future in health care, infrastructure, energy technology and the like, but we can say with a reasonable amount of certainty that there are a whole lot of jobs in a whole lot sectors where jobs lost this recession are not going to come back. For example, the 580k jobs lost in financial services; the 320k jobs lost in residential construction; the 1.7 million jobs lost in durable goods manufacturing; the 1.1 million jobs lost in the wholesale/retail sector; and the 380k jobs that were lost in the leisure/hospitality industry. That is over four million jobs that were shed this cycle that are not likely to stage a comeback even after the recession is over. To show you how big a number four million is, we didn’t create that many jobs in the prior expansion until it reached its fourth birthday towards the tail end of 2005.


As Bob Herbert points out in his article in the Saturday NYT, the unemployment rate for males has already soared to 10.5% whereas the rate for females is at 8.0% in the largest gender gap in favor of women since World War II. Has anyone worked through the sociological repercussions from this divergence on divorce rates, birth rates, even crime rates?

Moreover, since employers are favouring experience over youth, and because the savings-constrained folks over the age of 55 are getting whatever jobs there are out there, a massive pool of joblessness has been created this cycle among the younger-age cohorts where the unemployment rate for 20-24 year olds has surged to 15.0% (and 23.0% for 16-19 year olds). This, too, will have social implications going forward. As Lawrence Mishel, president of the Economic Policy Institute was quoted as saying in the Bob Herbert column, “I believe this is going to leave a permanent scar on a generation of kids”. Work habits and experience are honed when people are in their 20’s and this is the generation that is being most affected by the shrinking demand for labour — and this is going to lead down the road to a slower trend in structural productivity growth.

Quite frankly, we cannot imagine a more difficult environment for the stock market — the impact on both corporate earnings and fair-value estimates for the P/E multiple — than a backdrop that includes a permanently lower level of potential GDP growth alongside a record output gap. What that means is much lower volume growth and much lower pricing power over the next five to 10 years. This means that bear market rallies will come, as we have already seen repeatedly in the last two years with an obvious exclamation mark on the one posted from March 9 to May 4 … and they will go.

It is amazing how many pundits and media types believe we are in a new bull phase and yet the equity market has completely sputtered now for nearly three months above the 900 level on the S&P 500 and 8,400 on the Dow — not to mention the fact that instead of seriously breaking out above the 200-day moving average, the broad market has been struggling at this resistance level for the last few weeks, which is a sign that buying fatigue has likely set in (together with meager trading volumes).

It may well be true that the University of Michigan Consumer Sentiment index improved in June to 70.8 from 68.7 in May, but not every confidence measure showed ebullience last month. The Rasmussen index averaged 73.1, down from 74.1 in May, and the ABC News/Washington Post consumer comfort poll is sitting at -53 compared with -49 at the end of May and is a mere two points shy of hitting a new all-time low. Interestingly, the ‘personal finances’ subindex at -22 did hit a new record low and is worse now than it was back in mid-March when the equity market was cratering (was -4 at that time).
http://www.ritholtz.com/blog/2009/07/wage-deflation-in-our-midst/

[DantesPeak]

The unemployment report issued today shows that wages per working person (not adjusted for inflation) fell for the last three months, which hasn't happened for many years. However this by itself does not indicate we are heading into a permanent depression, at least one where economic activity will fall endlessly every month. But right now I would say that it is or near some kind of depression, depression in my definition as being a 10% fall in output, GNP, etc., from peak levels (in this case from the start of 2008).

[heroineworshipper]

Only if you're not a bank executive.

[Sixstrings]

$this->bbcode_second_pass_quote('VZR1800', 'I') have been layed off for six months now. Just now, today started federal extended benefits. I am 48, and feel I have not gotten many of the jobs I have interviewed for because of that fact.

Heck, I recently applied at a staffing agency for the first time,at the behest of my neighbor. He told me his company was hiring through them. Did all the obligatory paperwork, tests, etc. When completed, the lady kindly informed they had no jobs at all.

So I called the unemployment office to inquire about that and my extended benefits. While I had the lady cornered on the blower, I asked her about staffing agencies with no jobs. She told me point blank that none of them have any jobs at this time.

So when do I officially get scared?

[IgnoranceIsBliss]

Teachers in my area of Georgia are about to get the double whammy: Pay cuts (2.6%) and furloughs!

I also just love how this article tells us that future job growth will be in healthcare. Yeah, right. How many times are we going to hear this?
So every layed off teacher and office worker is now trying to get into healthcare. (I've heard teachers talking about this already) Meanwhile, many hospitals are actually cutting staff or hours.

It's scary to think that many of the jobs lost are never coming back. And no, not everyone will be working in healthcare or installing solar panels!

[Schmuto]

$this->bbcode_second_pass_quote('VZR1800', '
')
So when do I officially get scared?

[Sixstrings]

$this->bbcode_second_pass_quote('IgnoranceIsBliss', 'T')eachers in my area of Georgia are about to get the double whammy: Pay cuts (2.6%) and furloughs!

I also just love how this article tells us that future job growth will be in healthcare. Yeah, right. How many times are we going to hear this?
So every layed off teacher and office worker is now trying to get into healthcare. (I've heard teachers talking about this already) Meanwhile, many hospitals are actually cutting staff or hours.

It's scary to think that many of the jobs lost are never coming back. And no, not everyone will be working in healthcare or installing solar panels!

[Tyler_JC]

Depends on which group of "American People" you're talking about.

The highly educated, highly skilled, technologically savvy among us are thriving. Well, not necessarily thriving but they are certainly doing better than the people mentioned in your article.

Granted, they would have done well in any environment but they are particularly adept at taking advantage of the opportunities available to a globalized economy.

http://www.theatlantic.com/doc/200903/meltdown-geography

That article is a great summary of the likely outcome of all of this mess.

It's not that the working class has become much poorer over the past quarter century. The real standard of living for most of them has probably been roughly flat, maybe a small improvement.

It's the standard of living of the top 10% that has jumped ahead of everyone else.

The dramatic growth of those at the top has pushed inequality up substantially and is threatening the sustainability of the force that lead to that growth (aka, Globalization).

For ordinary folks living in ordinary places like Toledo, Ohio. Globalization sucks.

For ordinary folks living in extraordinary places like London or Manhattan, Globalization is net positive, but not necessarily by much.

For the extraordinary among us, Globalization is like an all you can eat buffet of prosperity.

(I claim to be a member of neither group)

The question is, will the ordinary allow the extraordinary to continue to reap most of the benefits of Globalization or will a class conflict ensue? Moreover, not to turn this into yet another political thread, does the election of President Obama and a solidly Democratic Congress represent the opening salvo of this class conflict?

[Schmuto]

$this->bbcode_second_pass_quote('Sixstrings', '
')Americans are being made to compete with the ENTIRE FREAKING WORLD. Well, problem is, most of the world will work for peanuts!

[americandream]

Sixstrings

You play with the free market, you get burnt if you have no capital. You never had a choice and you never will. Cry all you like, those who own capital will only pay you what the going rate is. And the rate is now set in China.

[Cloud9]

I have been employed for 42 years. For forty years, each year, I saw a nominal pay increase. As a result, I am currently making ten times my beginning salary. This gradual increase gave credence to the notion that each year, things were getting better. That trend has now reversed. Still, forty years of trends are difficult to erase from the public memory.

The mind set in Washington is that we must maintain the status quo at all costs. If we do that then things will at some point return to normal. The theory is that the economy is listing like a huge ship, but the core of the country like ballast will cause it in time to right itself. I am not so sure that theory is correct. As much as the Obama Administration would like to paint themselves as F.D.R. incarnate, they are currently following the same economic policy as was followed by Herbert Hoover. Both the Democrats and the Republicans are attempting to save the old captains of finance and industry at the public expense.

Right now, for those of us on the outside looking in, it might be tempting to paint Mr. Roosevelt is the darling of the day. We are all yearning for a new deal. We are wondering where are the CCC and the WPA? Still there is another danger.

It might be fair to argue that the policies of the new deal staved off a collapse of the political system. We did not have a communist revolution or a military coup. Still the evidence is mixed as to whether the social and economic programs of Roosevelt ended the depression. There is a small chorus of non believers who are arguing that economic programs Mr. Roosevelt put in place actually prolonged the pain. It must be remembered that five year plans and government controlled industry brought about the total collapse of the Soviet Union.

I tend to believe that it was the Second World War rather than Mr. Roosevelt that ended the depression. The war did five huge things: First off, it eliminated unemployment. Second, it caused a massive expansion of our industrial base. Third, it wiped out our European and Asian competition. Fourth, it caused a constriction of consumer goods which cause massive pent up consumer demand. And fifth, it caused saving in the private sector to became a patriotic duty.

When the war ended I believe it was pent up consumer demand coupled with private sector savings that propelled us into the happy days of the 1950’s and 1960’s. Without all five of these factors being in place, I fear it is naive to believe that the plutocrats in Washington can lead us into prosperity.

[pedalling_faster]

$this->bbcode_second_pass_quote('Cloud9', 'T')he war did five huge things: First off, it eliminated unemployment. Second, it caused a massive expansion of our industrial base. Third, it wiped out our European and Asian competition. Fourth, it caused a constriction of consumer goods which cause massive pent up consumer demand. And fifth, it caused saving in the private sector to became a patriotic duty.

[Cloud9]

Quite true but most of the dead were not consumers of American products.

[DantesPeak]

If you look into the events of the 1930s depression, they were erratic and uneven – thereby they did cause the depression to be extended. However was it the fault of Roosevelt, Hoover, or just the system and politics in place at the time?

Many of Roosevelt’s policies were abruptly stopped and later restarted due to opposition by the Supreme Court. The Federal Reserve also engaged in an unusual, and in retrospect, poor responses to rising federal deficits.

The only thing I find crystal clear about the depression is that after a deflationary period of about three years – caused in no small part by huge oil discoveries in the US – Roosevelt embarked upon a highly inflationary path to jump start the economy out of the depression. The economy did improve afterward, but not rapidly. Did the economy improve due to extremely low oil prices and better weather? Quite possibly, but the ‘lesson’ that Fed Chairman Bernanke got from this is that inflation works - and don’t change to a tighter policy prematurely.

How does this apply today? Expect inflationary policies. However I don’t think either deflationary or inflationary monetary policy can save the economy now. The relative cost of energy to everything else is what is sinking the economy, and that can’t be fixed by monetary policy.

[deMolay]

I am not in the workforce anymore but hear a lot of stories locally of workers being asked to donate time etc. to help preserve jobs. And taking vacation time to help cut inventories etc. Is this sort of thing going on in other places?

[Plantagenet]

Its the debt. Its all come due.

Banks with toxic debt, businesses like GM deeply in debt, individuals owe on underwater mortgages, states like California can't manage their affairs and issue IOUs and the federal debt is exploding.

Millions of people, businesses, some states and the federal government are all basically bankrupt.


Look...theres a black swan.

[Schmuto]

Gotta agree with Mr. Nobility here . . .

It's all about the debt.

America was going to come off it's post WWII high of cheap oil at some point.

What the debt did was allow us to push the day of reckoning forward 40 years.

Had we never taken the debt on, oun SOLs would have been much lower over the years and we would not be the "world power" we are today.

But, of course, the path down is now much steeper and deeper.

[dorlomin]

Everyone knows how one of the great millitary mistakes of WWII was the Anglo French generals failure to understand how it was not a re-run of WWI. IMHO the same mistake is being made about this recession depression. It is not a rerun of the great depression. I honestly think that some trade barriers to prevent a wage race to the bottom and some minimum wages both locally in for some international industries (like steel mills and car assembly) will help maintain a workforce that can purchase manufactured goods and prevent a very long term crisis of permentant over capacity in industries and cut throat wage cuts reducing the people who can buy what is being manufactured.

Its near heressy but its my deep held belief.