You May Choose From the Letters U and L

A V-shaped recession is rather clearly slipping from our grasp:

In order for the U.S. economy to go roaring right back to the 3%-4% long-term growth the bulls are looking for, consumer spending will have to rebound.

Consumer spending is still 70%+ of the economy, and it’s hard to get a supertanker cruising along at top speed if 70% of its power is removed.

In order for consumer spending to come roaring back, however, one critical thing has to happen:
Consumers have to be employed

If consumers don’t have jobs, they don’t have much disposable income. They also can’t borrow as easily (because, at least temporarily, banks have decided not to be stupid). And if consumers aren’t employed, companies that sell to them can’t grow as quickly, which affects the other 30% of the economy.

And how is consumer employment going? Badly.

Read the entirety of the lengthy exposition on the employment situation from Henry Blodgett.

The New York Times chimes in:

Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls.

“There’s too much uncertainty out there,” said Thomas A. Kochan, a labor economist at M.I.T.’s Sloan School of Management. “There’s not going to be an upsurge in job openings for quite a while, not until employers feel confident the economy is really growing.”

The NYT article goes on to illustrate weakness in nearly every sector of the economy. The only sectors that are hiring are government and its handmaiden industries, healthcare and education. I’m beginning to wonder if employment is not a lagging indicator when the economy is as dependent on retail sales as ours is.

I’ll also take this opportunity to suggest something I’ve mentioned in the past: an L-shaped recession may just be an economy that’s returned to trend, sluggish growth based on weak fundamentals which appears to be a decline since it follows a bubble.

6 comments… add one
  • I always hate harping on the economy, especially when my preferred party is not in power. My fear is one can wind up sounding like Paul Krugman from 2002 to 2006 who, as someone remarked at the time, “correctly predicted nine of the last zero recessions.”

    But the jobs picture is truly ugly, and not merely lagging (as you suggest.) What is needed is something like a “new internet.” i.e. some totally new arena for investment and potential growth akin to the 1990’s. Otherwise it seems we are relying on people without jobs to spend money to jumpstart a consumer economy.


  • Oh, I just re-read my post and it makes me sound as if I was disagreeing with you…. I was trying to agree.

    Me fail English? That’s unpossible!

  • I think that what’s needed is a new breed of entrepeneurship: people who want to do things and make things and make money in the process. The days of high returns overnight are largely gone.

  • Well looks like there is egg on the faces of DeLong, Krugman, et. al. and they should offer some sort of olive branch to Prof. Mankiw who raised the possibility of no “V” recession and was excoriated for it (can we simply institutionalize Krugman instead, the guy really is a loon).

    The lag in unemployment have been increasing. The recession under George H.W. Bush had a moderately long lag for unemployment. The previous recession even longer. One bit of research I saw suggested that with the last recession it was structural unemployment not cyclical.

    Cyclical unemployment is where unemployment is due largerly to changes in the business cycle. The economy goes into recession, people are laid off, but when the economy starts growing again then the unemployed are hired back often in the same positions they previously were in.

    Structural is where you have people leaving one part of the economy and never returning and thus seeking employment in another part of the economy. This can take longer since skill sets may not overlap.

    This is likely where Krugman, et. al. fell flat on their faces. They discounted this possibility when they looked at the recession. They figured that we’d get bounce backs in the same industries that were employing people before the recession. Given that a large number of people were employed in construction and real estate and that we have a housing glut, this was a glaring oversight on their part.

  • I think it would be be interesting to consider an economic model in which credentials were required for all jobs and various lengths of time required to secure a credential with perturbations to eliminate job classes held by different proportions of the population. My intuition is that there’s some “sweet spot” at which credentialing works to ensure a balance among productivity, costs, and compensation, beyond which the entire thing flies into a million pieces.

Leave a Comment