Jobless Recovery?

So you hear the term “Jobless Recovery” in the News, I want to take a look at the concept. The first thing that comes to my mind is the term is an oxymoron. After a little thought I think it is necessary, in order to have a meaningful discussion on the topic, to separate the micro from the macro. Certainly to the jobless individual who represents the “Micro” perspective, the concept is ludicrous. For him or her there can be no recovery in the absence of an income. For the economy of the nation there remains the potential for a recovery in the presence of a certain portion of the population being unemployed.

In order to continue we need to establish some definitions:
First, of course, is how do we define an economic recovery? The most general definition I could find is an increase in GDP (Gross Domestic Product). This definition is inadequate because if the GDP stays the same after a serious decline it leaves the economy at it’s low ebb. Also in the condition of an increasing population the GDP must rise to meet that condition or the effect will be a net negative. Slower declines are not recovery, and even if you consider them a “leading indicator” it seems folly to look at that as anything but very mildly positive. For the sake of this commentary I will use the following definition:
GDP growth sustained over at least a quarter (meaning 2 quarters of GDP growth) of 4% or more.
I do not believe a lower rate of growth would be enough to recover the losses sustained over the last 4 and would fail, putting our debt at great risk of default or require a second round of stimulus further devaluing our currency or both.

Second is how do we define jobless? 100% employment is not realistic, there will always be folks who for one reason or another do not enter the workplace, or transition in and out of the workplace. So for the sake of this commentary I will use the average unemployment overthe last 59 years as a base line, plus 1.7% for my definition of “Jobless” which is approximately 7.5%

The questions we are faced with are, can we achieve a 4% growth in real GDP in the face of near 10% unemployment? What is the correlation between rate of unemployment and GDP growth if any? At what rate of unemployment can a 4% growth rate be achieved? How do we get to those conditions?

Going back in recent history we see that Real GDP Growth has not occurred during the periods where unemployment exceeds around 7.5%

I believe this offers strong evidence that a 10% unemployment rate is too high for sustained GDP growth and that if we are to consider a recovery taking place we need to see that rate come down at least to 7.5% and continue to trend down. Looking back over the data we see an average unemployment rate near 5.8% but in the periods of higher than average unemployment the real GDP is flat or in the last few quarters down trending.

It would appear from the data that a 4% rate of Real GDP growth is possible at an unemployment rate of 6% and I’ll use this number as my guide in attempting to determine the potential of a recovery being realistic.

So we need to get the unemployment rate down to 6%. What does that mean?

Currently to reduce the unemployment rate to 6% we would need a build of slightly more than 5 million jobs.

Fridays jobless numbers showed an increase in the number of people filing claims for unemployment 550,000 Americans are now newly unemployed this week. Net job losses were 263,000, this was 100,000 more jobs lost than was expected by economists.

If we are to go by the metrics I have expressed above, there is no recovery yet, but there are mitigating and exacerbating factors that complicate the matter on both sides. We can also draw from the data, with less confidence that a recovery with a 7.5% unemployment rate or above is not possible. One of the concerns I have in making any determinations of economic conditions is the methodology of ascertaining the metrics themselves. Questions arise on the actual number of unemployed Americans, the calculation of the GDP, and even the population of employment aged people. The GDP in relation to foreign currencies and hard assets, as opposed to an absolute measure in US dollars is also worth considering in determining the actuality of a recovery.

I will at this point state that my opinion, based upon the data I have examined, is that we cannot say we are in a recovery, and we cannot have a “jobless recovery”. It is of course noteworthy to say that my opinion is not that of everyone, nor possibly is it even the majority opinion of economists or commentators, and it is clearly not the majority opinion of the talking head punditry on mainstream and business television.

A few things I want to add as a corollary to the above.

A long only mutual fund manager who says we’re in a recovery has zero credibility. A television pundit who’s ratings rely upon a good economy and a good market has nearly as little credibility. A CEO of a railroad, car company, retail chain etc. has a shade more credibility than that (and if he’s not buying his own shares he goes down to the rank of the long only guy). A perma bear who says we are clearly not in a recovery has little credibility as well.

I see a danger in overstating the case in either direction. If 15 million people hear how great the recovery is while they are having trouble putting food in front of their children, the potential for very serious social disruption rises, and if social programs become overwhelmed it could be critical. The inability of the people to find jobs and support their families, along with the real or perceived spreading between the haves and the have nots has led to some of the worst events in history, from the fall of Rome to Nazism and Stalinism and the pogroms and genocides they spawned. Constant harping of doom and gloom scenarios has the potential to contract the availability of credit, consumer spending, and business spending, which can result in a downward spiral that still is not totally off the table in the short or long term. It has the potential to lower our status in the world economy, put our currency in jeopardy, reduce our debt quality and produce an environment of severe inflation or deflation depending on how we react to it.

How do we get a recovery we can all agree on?

Foremost in my opinion is top line growth, businesses must grow organically not just show a better bottom line earnings report by reducing inventory, and staff. We will not see that until the consumer returns and the banks act like banks and not like investment outfits.

We need the banks to begin doing what the stimulus was intended to get them to do, lend money. That’s of course if you take the Treasury and the Fed at their word, since they brought the package to congress making those statements and then changed the direction of the money in a manner that needs to be the subject of a congressional hearings.  Businesses especially need operating capital and the banks are holding out on them. Homebuyers need mortgages and the banks are not stepping up anywhere near the level we need them to. We bailed out the big banks and instead of lending out the stimulus money they are holding it or buying equity or sovereign debt. The Fed lends you money at 0% and you put it in a 2,5,7,10, or 30 year US Treasury security and you have a zero risk profit, especially in a low inflation environment.

We need to reduce the inventory of houses on the market. As I just said, banks need to step up, but there are other things to do as well. The congress should extend the first time home buyer tax credit to all home buyers, whether rich or not, first timers or speculators. The good thing is, there is $120 billion of the stimulus money unspent in the hands of treasury that would be more than adequate to cover the tax credit (and double NASA’s budget as well for that matter). I’d give that money to the curing of the housing problem over leaving it in the hands of the very people who misallocated it in the first place.

We need the consumer to step up and return to the market for retail goods. This is a tricky chicken and egg scenario as the consumer will be reticent to show up if his job is at risk and the businesses won’t be hiring until the consumer returns. Sadly in our culture of immediate return the companies will be inclined to further cut to show some bottom line for every quarter.

We need to expand our industrial base into new areas and retrain some of our workforce to meet the needs for this new paradigm. We need to expand into areas that bring money back into the US or we will be at serious risk of failure.

And the hardest thing we need is for our government to act in a sensible fashion. If they had paid off the mortgages of everybody in the country it would have had the dual effect of detoxifying the MBS and CDS assets on the balance sheets of the banks and investment houses, and given the consumer a bolus of cash and/or equity at the same time. And it would have been cheaper to do.

In conclusion I will say we do not have a “jobless recovery” nor can we really say with any real confidence we have a recovery at all. But we have the capability of recovering and prospering if we act in a sensible manner. Looks like we are cursed with living in interesting times.

Finally, I will leave you as I posit on the economy with the words of John Kenneth Galbraithe “The only function of economic forecasting is to make astrology look respectable.”