Unemployment: How Much Will It Turn Around?

If you thought that the unemployment situation seemed particularly acute given the overall size of the recession, your suspicions are correct. This downturn is hitting worker harder than usual and it probably spells long-term problems.

From the WSJ:

The job market is doing even worse than the overall economy, prompting concern inside and outside the government that deeper-than-expected joblessness could persist once the recession ends.

Breaking from historical patterns, the unemployment rate — currently at 9.5% — is 1 to 1.5 percentage points higher than would be expected under one economic rule of thumb, says Lawrence Summers, President Barack Obama’s top economic adviser. Since the recession began in December 2007, the economy has lost 6.5 million jobs, 4.7% of total employment. The unemployment rate has jumped five percentage points, while the economy has contracted by roughly 2.5%.

In recent days, Mr. Summers, White House budget director Peter Orszag and Fed Chairman Ben Bernanke have all talked publicly about the unusual disconnect between growth and employment. Stubborn unemployment could be a political problem for Mr. Obama, who pushed hard for a $787 billion stimulus plan this year and has already been criticized by Republicans for failing to stem the rise in the joblessness.

The last two recoveries from recessions have been labeled as “jobless” as new job creation lagged badly behind rebounding GDP. This one might not be any different and it could be even worse.

The Journal article notes that productivity surged 5% by some estimates in the second quarter which would imply that companies are getting more adept at doing the same jobs with less labor input. The recent spate of earnings news has shown that aggressive cost controls have worked as company after company reported earnings above forecast despite significantly reduced revenues.

Consider this from Caterpillar (NYSE:CAT):

Caterpillar Inc. this week raised its profit forecast for the year, crediting cost-cutting efforts. The company’s second-quarter profits were $371 million, down from $1.106 billion a year earlier, but it said it squeezed operating costs by $4.5 billion from a year earlier. Layoffs and early retirements have reduced its work force this year by 17,100, 15% of the total, and it is instituting “rolling layoffs” in which it has been furloughing workers a few weeks at a time.

“When the economy turns around and demand picks up, we’re much better suited to ramp back up because we’re not looking at bringing on many new people and getting them up to speed,” says Jim Dugan, a Caterpillar spokesman.

I’ve written before about the fact that California has, since around 1991, had an unemployment rate that averaged 1.5% to 2% above the national average. Some, including myself, feel that the state never replaced the jobs it lost when the defense budget was cut drastically after the end of the Cold War. I am beginning to suspect that may occur on a national basis.

Certainly, jobs in finance and real estate won’t be as plentiful as they were during the early part of the decade. With the shrinkage of GM and Chrysler there is a permanent reduction of jobs in the auto industry and I suspect that one could come up with other industries that might not rebound to the same level of employment they enjoyed before the recession.

Bottom line, I think it’s entirely possible that you could be looking at something on the order of 6.5% to 7% unemployment for the foreseeable future. That’s a pretty remarkable change from the experience of the better part of the last two decades and one fraught with political and economic risk.

I can’t fathom that sort of structural unemployment not causing some rather radical political reprecussions. That might involve a shift in power from one party to the other or it might induce some extreme social engineering experiments on the part of the political class. Economically, it would consign the country to at best anemic growth if not lead us into a Japanese type malaise.

Keep an eye on this. It’s not the untold story of the recession but it may eclipse all of the other stories in time.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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