James Pethokoukis

Some interesting analyst from the St. Louis Fed:

What was unique about the jobless recoveries, say DiCecio and Gascon, is that the preceding recessions were structural ones. 75% of jobs lost in the 1990-91 recession and 50% of the losses in the ’01 recession were suffered by the manufacturing sector. That number is down to 25% during this recession. The assumption here is that it’s easier for service workers to find jobs in the growing service economy than for former manufacturing workers to make the shift into the service sector. And that makes sense to me.

Get ready for Stimulus 2.0 — Extreme Jobs Edition. Yes, the U.S. labor market is slowly healing. The declining number of monthly job losses and weekly initial unemployment claims show that. Yet President Obama still felt the need to announce a ‘jobs summit’ at the White House next month.

That’s compelling evidence that the White House doesn’t believe the job market is mending nearly fast enough to keep unemployment from trending higher — or Democratic electoral prospects in 2010 from trending lower.

The summit is likely a table setter for Obama to announce Stimulus 2.0 (though he surely won’t use the word ‘stimulus’) at his State of the Union address in January. Indeed, Harry Reid is already cooking up a plan in the Senate.

How much money are we talking about? Alec Phillips of Goldman Sachs calls $250 billion over three years a “conservative” estimate. And what might be in the bill? Look for more highway spending, more aid to state and local governments and some sort of business hiring tax credit.

All this represents a sharp departure in message from the White House, which has previously counseled patience. Let the $787 billion American Recovery and Reinvestment Act work, Team Obama kept saying. Even as the unemployment rate blew past 8 percent — a level of joblessness that the stimulus was supposed to prevent — the White House stuck to its guns and dismissed the need for significant new job creation efforts.

On the political side, there were fears that a new package would be tantamount to admitting Stimulus 1.0 was a failure and that it would distract from healthcare reform. On the economic side, many advisers wanted Obama to pivot toward deficit reduction as soon as possible and not spend more on stimulus.

(Indeed, the summit news came as the idea was floated that the administration might use unspent TARP funds for deficit reduction. Obama may also use the January address to announce a commission to deal with the long-term fiscal deficit as well as near-term limits on discretionary spending. Not only is the White House trying to appease bond vigilantes, but also moderate Democrats.)

But economic anxiety and impatience proved lethal for Democrats in the New Jersey and Virginia gubernatorial races, and may cost the party again in the 2010 midterms. That and the surge to double-digit unemployment changed the White House calculus. And don’t think David Axelrod didn’t notice that Republicans have overtaken Democrats 48-44 in the generic congressional ballot.

The new emphasis on jobs might be too late. Indeed, “new” is the appropriate word since the first package was not geared toward creating jobs so much as increasing economic output, as Lawrence Summers recently clarified. Temporary income tax cuts and credits, for instance, have a poor record of generating jobs.  As it is, some economists are looking for unemployment to hit 11 percent in 2010. David Rosenberg of Gluskin Sheff doesn’t see 13 percent as out of the question.

But better for the White House, from its perspective, to take the initiative and adjust their 2010 agenda now — so long cap-and-trade –  than have Speaker John Boehner do it for them in 2011.

Yes, says U. of C. prof Casey Mulligan:

Labor market distortions have gotten progressively worse during this recession. The federal minimum wage, for example, was increased once shortly before the recession began, a second time in the summer of 2008, and yet again this summer. The housing collapse has also had multiple harmful effects, such as impeding families who might want to move out of some of the hardest-hit regions toward areas where the economy is doing better.

These types of factors can make a bad labor market much worse. Some of the labor market distortions will stop getting worse over the next couple of months, as housing prices stabilize and the federal minimum wage stays put, but that does not mean that labor market problems will reverse themselves.

According to my measures, labor market distortions have been getting worse at the same rate over the past couple of months as they have throughout the overall recession. Moreover, Congress appears poised to further erode incentives to earn income as an accidental byproduct of its plans reforming health care. Nor do consumers seem to be spending in anticipation of a grand employment recovery.

Thus, my humble prediction for the next several months is that real incomes and spending will continue to grow, although likely at an annual pace less than the 3.5 percent estimated a couple of weeks ago. In other words, as many have feared, this part of the recovery will be “jobless,” in the sense that employment and hours will not rise significantly, and may continue to fall.

Gluskin Sheff economist David Rosenberg, formerly of Merrill Lynch, thinks the unemployment rate is going to at least 12 percent, maybe even 13 percent. Optimists, Rosenberg explains, underestimate the incredible damage done to the labor market during this downturn. And even before this downturn, the economy was not generating jobs in huge numbers. If he is right, all political bets are off. I think the Democrats could lose the House and effective control of the Senate.  I think you would also be talking about  the rise of third party and perhaps a challenger to Obama in 2012.

So here is what I gleaned from Rosenberg’s latest report (bold is mine):

1. For the first time in at least six decades, private sector employment is negative on a 10-year basis (first turned negative in August). Hence, the changes are not merely cyclical or short-term in nature. Many of the jobs created between the 2001 and 2008 recessions were related either directly or indirectly to the parabolic extension of credit.

2. During this two-year recession, employment has declined a record 8 million. Even in percent terms, this is a record in the post-WWII experience.

3. Looking at the split, there were 11 million full-time jobs lost (usually we see three million in a garden-variety recession), of which three million were shifted into part-time work.

4.There are now a record 9.3 million Americans working part-time because they have no choice. In past recessions, that number rarely got much above six million.

5. The workweek was sliced this cycle from 33.8 hours to a record low 33.0 hours — the labour input equivalent is another 2.4 million jobs lost. So when you count in hours, it’s as if we lost over 10 million jobs this cycle. Remarkable.

6. The number of permanent job losses this cycle (unemployed but not for temporary purposes) increased by a record 6.2 million. In fact, well over half of the total unemployment pool of 15.7 million was generated just in this past recession alone. A record 5.6 million people have been unemployed for at least six months (this number rarely gets above two million in a normal downturn) which is nearly a 36% share of the jobless ranks (again, this rarely gets above 20%). Both the median (18.7 weeks) and average (26.9 weeks) duration of unemployment have risen to all-time highs.

7. The longer it takes for these folks to find employment (and now they can go on the government benefit list for up to two years) the more difficult it is going to be to retrain them in the future when labour demand does begin to pick up.

8. Not only that, but we have a youth unemployment rate now approaching a record 20%. Again, this is going to prove to be very problematic for employers in the future who are going to be looking for skills and experience when the boomers finally do begin to retire.

9. The gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally this spread is between 3-4 percentage points and ultimately we will see a reversion to the mean, to some unhappy middle where the U6 may be closer to 15.0-16.0% and the posted jobless rate closer to 12%. This will undoubtedly be a major political issue, especially in the context of a mid-term elections and the GOP starting to gain some electoral ground.

10. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

11. So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.

12. After all, the recession ended in November 2001 with an unemployment rate at 5.5% and yet the unemployment rate did not peak until June 2003, at 6.3%. The recession ended in March 1991 when the jobless rate was 6.8% and it did not peak until June 1992, at 7.8%. In both cases, the unemployment rate peaked well more than a year after the recession technically ended. The 2001 cycle was a tech capital stock deflation; the 1991 cycle was the Savings & Loan debacle; this past cycle was an asset deflation and credit collapse of epic proportions. And economists think that the unemployment rate is in the process of cresting now? Just remember it is the same consensus community that predicted at the beginning of 2008 that the jobless rate would peak out below 6% this cycle.

First, Geithner on the dollar and deficits:

“I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar,” Geithner said in a meeting with Japanese reporters at the U.S. embassy.  “We bear a special responsibility for trying to make sure that we are implementing policies in the United States that will sustain confidence … in investors around the world that as growth recovers and growth strengthens that we’re going to bring our fiscal position back to a sustainable balance,” he said.

Now, Harry Reid on job creation:

Senate Democrats will take up a new job-creation bill in the wake of the 10.2 percent unemployment rate, Majority Leader Harry Reid told his colleagues Tuesday. … House Democrats have signaled openness to a tax credit for each new hire companies make, but lawmakers have yet to introduce a bill proposing it.

Me: Look, it is going to be jobs first, deficit second with the ObamaCrats. I would not be surprised if Obama’s State of the Union address paired a near-term jobs bill with some commission to deal with the longer-term deficit so as to not freak out the bond vigilantes. A jobs bill would also leapfrog past cap-and-trade, which is starting to look like a 2011 issue.

I am not sure Jon Hilsenrath of the WSJ does: “It’s hard to get inflation when unemployment is so high.”

Just go back to the 1970s, my friend. How about 1975 when we had roughly 9 percent inflation and 9 percent inflation and 8.5 percent unemployment? There’s your Misery Index. Actually, the rest of the article is quite good, focusing on how banks are buying treasuries rather than lending.

Some interesting charts (via TNR) looking at the linkage between unemployment and disapproval ratings:

Here are a few opinions about the jump in the unemployment rate that caught my eye:

1) Dean Baker, Center for Economic and Policy Research

The October unemployment rate is still below the 10.8 percent peak reached in December of 1982, but the workforce is considerably older now and in age cohorts where workers are less likely to be unemployed. If the workforce had the same age distribution as in 1982 but current unemployment rates for each age cohort, then the unemployment rate would be more than a percentage point higher. The 10.7 percent unemployment rate for men is 0.6 percentage points higher than the 10.1 percent peak in 1982. This is consistent with the massive job loss in construction and manufacturing.

In all likelihood, the economy will continue to shed jobs, at least through the rest of the 2009 and probably into the first months of 2010. The unemployment rate will probably not peak until the spring of next year, at close to 11.0 percent.

2) Michael Feroli, JPMorgan

Even worse than this were the figures reported in the household survey of employment. The unemployment rate smashed through the psychologically significant 10% level to hit 10.2% in October. This came even as the labor force participation rate fell another 0.1% last month to fall to 65.1%. Normally, a falling participation rate would be expected to temper any increase in the unemployment rate, as discouraged workers who drop out of the labor force no longer count as officially unemployed. Moreover, the measure of employment in the household survey fell 589,000 in October and has been significantly weaker than the establishment survey measure over each of the prior three months.

Among the other details in the household survey, the unemployment rate for college-educated persons has actually been roughly stable since June at 4.7%, while less-educated groups have seen a big move up. The male unemployment rate hit a post-war high of 11.4% last month, breaking the previous record of 11.2% in December of 1982. . According to the CPS labor force flow data, only 15% of unemployed persons found a job last month, a new low.

The 190k payroll drop, combined with the 91k in upward back-revisions, slightly outpaced assumptions. Yet, the workweek failed to rise from its 33.0 cycle-low, hence leaving a 0.2% drop in hours-worked that will weigh on Q4 GDP estimates, as will the hefty jobless rate surge to 10.2% that shattered the 10% psychological barrier. The household survey also revealed a sobering 589k drop in household employment, while hourly earnings failed to provide any low inflation solace, with a 0.3% gain.

Some quick hits:

1) Remember in the early 1980s 7 straight quarters of avg. GDP growth of roughly 7% (!) lowered jobless rate by only 2.5 percentage points. Hard to see economy booming like that between now and Election Day 2010.

2) Healthcare has added nearly 600k jobs during recession. Good thing Congress is leaving that sector alone. Oh, wait …

3) Obama’s lost year: 2009 may end with no HC, capandtrade, financial reform — just a $787b stimulus that didnt prevent 10.2% unemployment. That is going to be the economic assumption of the average voter, I would think.

4) Dem conundrum: the worse economy gets, more people distrust government. Bad economy was supposed to increase desire for “economic security” …this was reflected in Virginia vote, certainly

5) Will WH actually try and focus on fact that the economy lost 29k fewer jobs in Sept. vs. Oct.? Lead balloon.

6) It’s not that the recession is worse than WH thought, it’s that their model of how the economy works is dysfunctional.

7) End of the Affair? You can be sure liberals (like Krugman) are hugely second guessing Obama decision to not press for LARGER stimulus

Good point from David Goldman:

The big issue in the US economy is the massacre of small business. That’s why the household survey shows that 558,000 Americans “became unemployed” during October, while the establishment survey of payrolls shows a decline of only 190,000 jobs. The establishment data, which are collected from larger businesses, are more reliable; the household survey is based on telephone interviews with randomly-selected households. But the numbers are so large as to make clear that small businesses are shutting down.

With commercial and industrial lending by American banks down 13% since September 2008, and most banks continuing to “tighten lending standards” in the Fed’s official poll, this is not surprising. Wal-Mart will make it through a recession; not the tea-cozy shop down the mall corridor, much less the real-estate agency in the half-abandoned exurb. The global speculative grade default rate, as Moody’s reported this week, has risen to a post-Great Depression high of 12%. Credit lines for small businesses (including home equity, credit cards, and all the other devices entrepreneurs use to fund themselves) will continue to shrink.

Me: By the way, one-third of the revenue from the surtax in the House healthcare bill would come from small business.