The negative feedback loop

July 2, 2009

Another month, another dismal jobs report from the U.S. Labor Department. It’s hard not to gulp when you see another 467K jobs lost this month. And an unemployment rate of 9.5% isn’t exactly heartwarming.

The jobs report certainly has its detractors who say it’s not the best indicator to watch when you’re looking for signs of recovery since it lags turning points in the economy. But given the role of the U.S. consumer, who has driven the economy out of previous recessions, the rapid fire deterioration in the labor market is likely to create a negative feedback loop.

In a post yesterday, I noted the swelling ranks of unemployed is pushing the delinquency rate higher on prime home loans – mortgages made to homeowners who had solid ratings histories and often put down a sizable downpayment when purchasing a house.  The acceleration in delinquencies as homeowners lose their jobs and can’t find new ones means there could be another down leg coming in housing as well as in securities backed by such mortgages.

If you can’t pay your mortgage, you also most likely will fall behind on your credit card payments, which means more losses for banks.

The trillions of dollars of stimulus and bailouts have helped stabilize what had been a global financial system on the brink, which is a good thing. But it may take much more money and time for consumers to rebuild their battered balance sheets and feel confident enough that either they won’t lose their job or will be easily able to find another so they’ll buy that big screen TV, that second or third car or a new house.

Until then, it’s hard to get too excited about a turnaround.

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