James Pethokoukis

Politics and policy from inside Washington

SF Fed: Near 11 percent unemployment and a jobless recovery

Jun 9, 2009 00:28 UTC

The San Francisco Fed paints a gloomy outlook for the U.S. labor market with unemployment hitting near 11 percent next year and above 9 percent through 2011(bold is mine):

We combine data on involuntary part-time workers with the standard unemployment rate to arrive at an alternative measure of labor underutilization. We plot this measure in Figure 3, which shows that the labor market has considerably more slack than the official unemployment rate indicates. The figure extends this labor underutilization measure using the Blue Chip consensus forecast for the unemployment rate as a benchmark and then adding a share of involuntary part-time workers based on the proportion of workers in that category to the unemployed during the current recession. This projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate. This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.


Does this explain rising bond yields?

Jun 8, 2009 19:30 UTC

This chart from Jim Glassman of JPMorgan makes an argument about seasonality:


Xerox CEO: The good times are really over for good

Jun 8, 2009 19:11 UTC

Here is a bit from Meet the Press from May 31 (pointed out by David Henderson) where David Gregory interviews a gloomy  Anne Mulcahy, CEO of Xerox:

MR. GREGORY:  So when there is recovery, Anne, what is the new normal?  What does the new economy look like?  How is it different?

MS. MULCAHY:  Well, I think it’s slower growth.  I think that, you know, we’ll all be living in a world where perhaps the capacity that got created in the last decade is not coming back as quickly.

MR. GREGORY:  Meaning we talk about–is wealth going to return?

MS. MULCAHY:  I think wealth does return.

MR. GREGORY:  To the levels that we’ve experienced it?

MS. MULCAHY:  Not to the levels we’ve experienced it.

MR. GREGORY:  Right.

If economy improves, does GOP have a plan B?

Jun 8, 2009 18:09 UTC

Over at NRO, my pal Ramesh Ponnuru looks at all the green shoots and mustards seeds and wonders the following:

Are Republicans and conservatives overinvesting in pessimism about the recession? … If Republicans keep up this approach and the economy does begin to recover in a way that registers with voters by the 2010 elections, then Obama and the Democrats will … be able to say that their take on the economy was superior to that of the Republicans—and that claim will reinforce impressions that their stimulus was responsible for any improvement (whether or not it actually was). … I think Republicans would be better advised to say that there are some good signs, none of which seem connected to liberal policies, and that those policies threaten to increase inflation before too long. …  In 1993 too many Republicans resisted Clinton’s tax increases by claiming that they were not merely likely to reduce long-term growth below what it would otherwise have been but that they were incompatible with economic growth at all. When the economy recovered, they were discredited and the recovery was attributed to Clinton’s policies. Let’s not make the same mistake this time around.

Me:  My guess is that unemployment will still be pretty high a year from now and real estate hardly booming. As far as how the economy might affect the electorate, what I do know is that there is lag between economic performance and economic perceptions that is greater than many might assume. Let me point out one example, the 1994 midterm elections after the 1990-91 recession:

Even though the economy had then been growing for 14 straight quarters and the unemployment rate was down to 5.8 percent, 72 percent of Americans still thought the economy was “fair” or “poor” and 66 percent though the nation was headed in the wrong direction.  That’s right 3 1/2 years after the 1990-91 recession ended, the economy was still weighing negatively on voters and hurting the incumbent political party.

A salad of green shoots and mustard seeds

Jun 8, 2009 17:52 UTC
Brian Wesbury and Bob Stein of FIrst Trust Advisers offer some sunshine on the U.S. economy:
1) Since bottoming in February, consumer confidence has had the fastest three-month increase on record.
2) The ISM manufacturing index, which fell to historic lows over the winter, has climbed from its hole to signal that the overall economy is now expanding.
3) The Richmond Federal Reserve index, a measure of manufacturing in mid-Atlantic states, is showing growth.
4)  Container shipments both into and out of the ports of Los Angeles and Long Beach – key measures of international trade – have traced a V-shaped recovery.
5) In the financial markets, the yield on the 10-year Treasury note is back up to 3.86%, almost exactly where it was in August 2008, just before the crisis hit.
6) The VIX Index – a measure of stock market volatility and risk – has also traded back to levels not seen since August 2008.
7)  Meanwhile, key commodity prices, such as oil, copper, lumber, and gold are well off crisis-period lows.
Their bottom line:
In the last full calendar quarter before September (the second quarter of 2008), real GDP grew at almost a 3% annual rate. This is exactly what we expect for the third quarter of 2009 – 3% real GDP growth – with even faster economic growth in Q4 and then in 2010.

Banks out of the woods … or not

Jun 8, 2009 14:20 UTC

This is my choice hunk of the day from the brain of economic analyst Ed Yardeni:

(1) The most bullish development is the record spread between Treasury note and bond yields and the federal funds rate. Historically this has been a big booster of net interest income for the banks. Another major positive is the narrowing of credit quality spreads in the bond markets.
(2) The relaxation of the mark-to-market rule on April 2 should continue to provide for positive y/y comparisons for bank earnings.
(3) The banks have raised lots of additional capital in the bond and stock markets and are meeting the requirements to shore up their balance sheets following their recently completed stress tests.

Now here is the downside:

(4) The bad news is that rising mortgage rates are already depressing mortgage refinancing activity, which was a major source of earnings during Q1.
(5) The jump in the unemployment rate means that bad loans to individuals could mount during the second half of the year.
(6) Residential and commercial mortgages are also likely to generate more bad loans over the rest of the year.



I don’t think banks are out of the wood yet! With a slow economy the next waive of default will be coming from commercial mortgages.
We started seeing more defaults. I think Banks will suffer more loses this year.

We hope for the best.

Eddie Fadel

Rail not as green as you might think

Jun 8, 2009 13:53 UTC

Here is an interesting bit from New Scientist that the White House might want to consider before spending billions on high-speed rail:

Crisscrossing the US with a rail network, however, creates a different problem. More than half of the life-cycle emissions from rail come not from the engines’ exhausts, but infrastructure development, such as station building and track laying, and providing power to stations, lit parking lots and escalators.

Any government considering expanding its rail network should take into account the emissions it will generate in doing so, Chester says. Setting up a public transportation system that only a small proportion of the population uses could generate more emissions than it cuts, he adds – especially if trains and buses are not well connected.

“New rail systems should serve as links to other transit modes, as is often the case in Europe and Japan,” he says. “We should avoid building rail systems that are disconnected from major population areas and require car trips and parking to access.”


“Setting up a public transportation system that only a small proportion of the population uses..” A large portion will have to use it, just as in Europe, because we can’t keep up this gas-guzzling crap forever.

Posted by C. C. Millah | Report as abusive

Sentence of the day

Jun 8, 2009 13:48 UTC

From the NYTimes articles on a White House effort to control executive compensation in the financial industry:

“In the past, banks had free rein to determine the base salary and bonuses they awarded their employees.”

Me: Or put it this way: “”In the past, companies could pay their workers at a level that made business sense.”


What a private sector company chooses to do with their dollars is entirely up to them — http://en.wikipedia.org/wiki/Capitalism — Probably the strongest argument against bailouts.

On the contrary, public funds raised through taxes most certainly are not subject to the same indiscretion. Setting pay restrictions in the private sector sounds like an idea taken straight out of the Communist Manifesto. This notion of disincentivizing people to produce and generate more products and wealth will inevitably guarantee a future of mediocraty in a country founded on innovation and private business.

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”
~Winston Churchill

Posted by JMichael | Report as abusive