The Job News is Not Good

As you are probably aware, job creation fell last month and we actually lost 4,000 jobs, on net, for the first time in several years.

I haven't done much forecasting here, I'm too optimistic and get too invested in my own calls when I do, and I find myself tending to interpret incoming data in ways that support the call. So I mostly avoid calling the economy. It's not a game you can win very often, and I don't devote enough time to looking at all the underlying data to really get a good sense of, say, what employment in this or that industry is doing this month, etc.

So I will leave forecasting to others, Tim does it here, but it's hard to interpret today's report and recent trends in job creation positively. Those who do make forecasts, some of whom have been calling a recession for a year or more - several years in a couple of cases - may finally see their forecasts validated and be able to pat themselves on the back, but I still find myself hoping that somehow this will work itself out and the workers who have lost their jobs will get reabsorbed quickly into equivalent employment in other sectors.

For the supply-side types who support tax cuts because they promote economic growth by reducing economic distortions, I guess it's time to start writing the inevitable "think how bad things would have been without the tax cuts" columns. But as you are writing and find yourself tempted to call for further tax cuts to avoid a recession, remember that using tax policy to stimulate the economy and reduce the severity of downturns is Keynesian economics, not supply-side policy, something that many of you have confused in the past. I am not at all opposed to interventions to stabilize the economy, though tax policy is just one of many options (and who gets the tax cuts matters as well), but let's not pretend that using tax policy to stimulate the economy is faithful to supply-side ideals.

I'm short on time for the moment, so to fill the void here's something I wrote a little over two years ago on this general topic [edited]:

The Insurance Value of Increasing the Federal Funds Rate: ...The extraordinarily low interest rates brought about a sectoral imbalance in the economy. In models with sluggish prices and wages, it is the change in relative prices brought about by the accommodative money that causes the imbalance. We hear stories about the imbalance all the time, the high number of workers in housing construction, the rising number of realtors, all of the secondary jobs, and so on. It seems very clear that a relative price distortion between sectors brought about by low interest rates has led to an economy that is very unbalanced towards interest sensitive sectors such as housing, and there is a lot of concern about our vulnerability due to that imbalance. If the imbalance was caused by low interest rates, then the solution is to raise interest rates to take away the incentive that caused the imbalance to begin with. Until the incentive that caused the imbalance is removed, until rates are raised, the imbalance and the vulnerabilities that come with it will remain.

Paying the fiddler is always painful. If we intentionally unbalance the economy to attenuate a recession, then much like Keynesian policy of running a surplus in good times to pay for the deficits used to stimulate the economy in bad times, rising interest rates and slower economic growth are the costs that must be paid to attain a healthier more balanced economy during the recovery period. But it's always tempting to avoid such costs.

Think of the housing sector as a balloon with too much air, a balloon ready to pop if subjected to additional stress. The chance of the balloon bursting is reduced if we let the air out very slowly and carefully. Thinking further of the escaping air as resources flowing out of the housing sector, we shouldn't allow the air escape, but instead use it to re-inflate balloons representing other sectors of the economy, hopefully sectors that could use the infusion of resources. There are lots of policies that can be implemented to facilitate this structural change outside of monetary policy, policies that allow as little air to escape as possible during the sectoral rebalancing, and those ought to be pursued vigorously.

I believe that getting the air out of the balloon at a slow, measured pace so as to re-inflate other sectors, with everybody warned that it is happening so that if the balloon pops loudly nobody jumps out of their seat, is best for now. This will require raising the federal funds rate. I want labor and other resource and output markets to be as robust as possible against shocks when the next one hits, and one will hit someday, and rebalancing the economy is an essential insurance policy against such risks. Slower output growth during the rebalancing period is the cost of the insurance premium for labor and I understand that some feel the insurance is far too expensive. For now, I do not.

We did raise rates, but it appears that resources may not have moved out of housing fast enough to avoid a "pop". We shall see.

Comments

[oops]

if you take out the top 4 states defaults in the most recent mortgage bankers survey the default rate declined. other reports have thing slowing in some states without high default rates though. so i'm also optimistic that this can be more gradual than we are often told in the press.

[Bruce Webb]

There have been heavy levels of layoffs in lending, in numbers maybe large enough to move the metric. Thus we have the NYTs this morning with More Layoffs in Mortgage Industry and on Aug 22 MSNBC published Mortgage industry job cuts surpass 40,000
Companies stop 'on a dime'; 25,000 positions eliminated so far this month
Since the start of the year, more than 40,000 workers have lost their jobs at mortgage lending institutions, according to recent company layoff announcements and data complied by global outplacement firm Challenger, Gray & Christmas Inc. Meanwhile, construction companies have announced nearly 20,000 job cuts this year, while the National Association of Realtors expects membership rolls to decline this year for the first time in a decade.

It’s an employment collapse that threatens to rival the massive layoffs in the airline industry that followed the Sept. 11, 2001, terrorist attacks, when some 100,000 employees lost their jobs.

“It’s far from over,” said Bart Narter, a senior analyst with Celent, a Boston-based financial research and consulting firm. “The subprime lending collapse will continue to ripple through the financial sector.”
Mark I too remain relatively bullish looking forward, mainly because I am factoring in substantially different deficit figures ten years out. Roubini may become thoroughly vindicated. But then again if you continually predict disaster someday events will shape themselves in a way that can be used to support that prediction.

People at AB discount the continuing stubbornly stable 4.6% unemployment rate by point to labor participation, well to me it suggests that if you want to work the odds are pretty good you can get a job, that people react to slowdown in jobs added or in this case lost by leaving the work force to me says more about wages than anything. Because we have been sitting at 4.5-4.6% for a long time now.

[spencer]

To really be a bear. The Japanese had their capital spending and housing bubbles simultaneously. It took them about 15 years to recover.

The US is having it capital spending and housing bubbles lineraly. Does this mean it will easier for the US to adjust then it was for the Japanese?

I'm well aware of the differences. But it would make an interesting topic to discuss over the weekend.

[anne]

"I haven't done much forecasting here, I'm too optimistic and get too invested in my own calls when I do, and I find myself tending to interpret incoming data in ways that support the call."

Agreed; but I wish the Federal Reserve had lowered short term rates early this summer.

[Barry]

"People at AB discount the continuing stubbornly stable 4.6% unemployment rate by point to labor participation, well to me it suggests that if you want to work the odds are pretty good you can get a job, that people react to slowdown in jobs added or in this case lost by leaving the work force to me says more about wages than anything. Because we have been sitting at 4.5-4.6% for a long time now."

Posted by: Bruce Webb

IIRC, the median wage rate has been flat for a few years now, which adds weight to the theory of labor force participation ratio changes.

[anne]

Spencer asks what we have asked often from 2002, where is corporate investment? What limited problems from a slowing in housing internationally has repeatedly been corporate investment and infrastructure development. What about here? I had been fairly confident till this summer, but am increasingly less confident domestic investment will hold properly unless the Federal Reserve acts quickly.

[Mark Thoma]

C + I + G + NX = Y

C - held back by housing, but seems surprisingly robust. But can't imagine it picking up any slack. Tax cuts can affect this, but don't think it would be enough.

G - available, but won't be used with this congress/pres., and not with the focus on the deficit as a measure of economic performance (even though it may not be correct to use it in this way).

NX - hard to see this picking up the slack, the hope instead is that the foreign sector doesn't get pulled down with our economy, so this is unlikely to offset slowness.

I - so this is where some people focus (non-residential part). Lower interest rates might help, but have some doubts about the interest sensitivity of investment in a pessimistic environment. But if it's not I picking up the slack, hard to see what will.

That's all pretty off the cuff...

[Peter Schaeffer]

I hate to point out the obvious , but consumer spending has been running (in part) on MEW for years. Anyone who doubts this, needs to spend more time over at Calculated Risk (http://calculatedrisk.blogspot.com/).

Given that the housing bubble is over, MEW can be expected to decline further, perhaps all the way to zero. This will impact consumer spending on a fairly broad basis and depress the economy.

Investment (at least in the US) isn’t going anywhere, anytime soon. The overvalued dollar makes investment abroad considerably more attractive, than capital investment in this country. Ditto for outsourcing.

Foreign demand may rise modestly because of ongoing expansion abroad. However, once again the overvalued dollar is the key obstacle to expanding NX materially.

For better or worse, the overvalued dollar is the key obstacle to improving the economic prospects for the US economy. The US badly needs to devalue the dollar against its major trading partners including Canada, Mexico, non-China Asia, China, and of course the Eurozone.

This won’t be easy because of explicit and de facto currency pegs against the US dollar. Sadly, these currency pegs are defended not just by the governments in question, but by an array of special interests that benefit from the overvalued dollar. In spite of all of that, the US must either break the pegs or suffer the consequences of not doing so.

[Patricia]

My trailer park became mostly Mexican a few years ago. For several months, we have had an increasing number of vacancies, because the people worked in counstruction, which is down, so some are moving back to Mexico.
When I moved in here, I had to wait several months before someone moved out so I could buy a home. Now, the "For Sale" signs have been up for months.

With housing costing more than most people can afford, wages for most people decreasing, the savings rate negative, the economy kept going by borrowing, I don't see how anybody could not foresee a severe downturn eventually. But then, I don't understand a lot of thinking of many people. The problems with the subprime mortgages simply make things worse.

When housing costs go up so much, it means fewer people can afford them, which can't go on forever. And what do you think will happen when baby boomers start retiring in large numbers, and wanting to start selling their houses and stock? I guess the ultr-rich will buy them up cheaply and further increase inequality in our country and make it even harder for most people to afford a house of their own.

Where did the weird idea come from that only the upper-middle class and beyond should be able to afford a place to live?

[calmo]

Just how bad is this job number (-4,000)?
Plus or minus the usual 100,000, no?
No. It comes along with a revision in last month's tally, otherwise it would have been even worse (don't make me look it up, because I'm still holding with my Plus or Minus), no?
No. It comes along with an even further revision in next month's tally, which will lower July and Aug numbers to make September's less catastrophic than it is.
Plus or minus 100,000 of course.
Me and the throng of illegal aliens are imperturbable.

[Ken]

"NX - hard to see this picking up the slack, the hope instead is that the foreign sector doesn't get pulled down with our economy, so this is unlikely to offset slowness."

Many of CNBC Laffer Kudlow crew point to the weakening dollar and the rise in exports as a point of optimism. It seems to me at some point this weakness would slow the inflows of foreign capital at a faster rate then exports would rise

"I - so this is where some people focus (non-residential part). Lower interest rates might help, but have some doubts about the interest sensitivity of investment in a pessimistic environment. But if it's not I picking up the slack, hard to see what will.

doesnt the recent credit crisis suggest a situation where the capital markets may not be willing to supply the liquidity if the expectation of the return is not there?

[Peter Schaeffer]

Patricia,

"Where did the weird idea come from that only the upper-middle class and beyond should be able to afford a place to live?"

You just don't understand. It the way things are supposed to be, and mass immigration is the perfect tool for achieving class nirvana. David Brooks caught this perfectly. See "Karl's New Manifesto" (http://www.nytimes.com/2005/05/29/opinion/29brooks.html?incamp=article_popular). Money quote

"They congregate in exclusive communities walled in by the invisible fence of real estate prices, then congratulate themselves for sending their children to public schools. They parade their enlightened racial attitudes by supporting immigration policies that guarantee inexpensive lawn care."

Of course, “Anne” will tell you this is really paradise.

[Patricia]

http://www.cbsnews.com/stories/2007/09/07/business/main3240849.shtml
Employers sliced payrolls by 4,000 in August, the first drop in four years, a stark sign that a painful credit crunch that has unnerved Wall Street is putting a strain on the national economy.

The latest snapshot of the employment climate, released by the Labor Department on Friday, also showed that the unemployment rate held steady at 4.6 percent, mainly because hundreds of thousands of people left the work force for any number of reasons.

Job losses in construction, manufacturing, transportation and government swamped gains in education and health care, leisure and hospitality, and retail. Employment in financial services was flat. The weakness in payrolls reflected fallout from a deepening housing slump, a credit crisis and financial turbulence that has made businesses more cautious in their hiring.

On the payrolls front, job gains in June and July turned out to be smaller. The economy added 68,000 new jobs in July compared with 92,000 reported a month ago. For June, 69,000 new jobs were created, less than the 126,000 previously reported.

The 4,000 jobs cut in August are from both private and government employers. The government actually cut 28,000 jobs, while all private employers added 24,000.

Of course, those 24,000 jobs added by private employers is subject to change in a few months.

[donna]

"Where did the weird idea come from that only the upper-middle class and beyond should be able to afford a place to live?"

Or much of anything else for that matter. Even working stiffs used to get a decent wage and a pension in this country.

Messed up values = messed up economy.

[bruce webb]

Peter S

While Tanta is a national treasure generally the commenting at CR is often tied to simplistic models of housing that don't properly account for differences between performance by market and the disparate effects of weighting. That is 20% correction in a LA market that had a 40% runup from a median of $500,000 is going to whipsaw national agregates without necessarily telling you anything about MEW in Seattle. Suggestions that MEW is going to zero is to misunderstand the market fundamentals. Housing markets obviously interreact, mainly because housing finance as currently structured is national, but real estate fundamentally is local and reacts to employment and wages locally.

[Peter Schaeffer]

bruce webb,

In the Case-Shiller the LA housing market peaks at 273.94 in September of 2006. That's a bit more than 40%. Note that the same index has fallen to 264.58 as of May 2007. Note that these are nominal dollar values.

Of course, the magnitude of price escalation differs by market. However, the CSXR peaked at 226.29 and the SPCS20R peaked at 206.39. Both indexes ended up more than 100% up from 200.

As one might expect, MEW varies by market. However, I have never seen a regional or state breakdown. Nonetheless it is a national statistic. As housing prices recede countrywide, MEW is falling accordingly.

I agree that housing markets are ultimately local. However, the sum of the localities is national and MEW will be impacted. My suggestion that it is going to zero is a pretty easy extrapolation of the CR charts.

[cm]

Patricia: You already got a few responses to

"Where did the weird idea come from that only the upper-middle class and beyond should be able to afford a place to live?"

but let me offer this -- I consider myself "below" those classes, but I'm renting a fairly good (for my standards) abode at substantially less than I would have to pay for a comparable "owned" house, in fact buying this house would be quite out of my reach.

Of course, that is with the caveat that house prices are so far out of line that our landlords can get good cash flow from our "lower" rent because they bought the house before the big price run-up. Otherwise our rent would probably be closer to a fully-loaded mortgage payment (or rather the latter to the former).

[knzn]

You use the phrase "job creation" to mean "net job creation." To me "job creation" means "gross job creation." (Then there is "job destruction," which offsets gross job creation.) Just to note, gross job creation -- though always positive -- has been falling for a while, and help wanted advertising has made a new low every month since January.

I'm a bit more optimistic about NX, though. The dollar is weak, the world economy is strong, and we've got a nice J-curve effect going on from the last 5 years of dollar/euro movements. An improved trade balance could pull us through if we get enough of a multiplier-accelerator effect from it. Unfortunately, I think the multiplier effect is going to be pretty weak. What is the marginal propensity to consume when consumers are already spending more than their income, and their assets have stopped appreciating?

[evagrius]

David Brooks caught this perfectly. See "Karl's New Manifesto" (http://www.nytimes.com/2005/05/29/opinion/29brooks.html?incamp=article_popular). Money quote

"They congregate in exclusive communities walled in by the invisible fence of real estate prices, then congratulate themselves for sending their children to public schools. They parade their enlightened racial attitudes by supporting immigration policies that guarantee inexpensive lawn care."

Of course it's a self-portrait.

[ken melvin]

For anyone who likes, the numbers for MEW:

http://www.federalreserve.gov/pubs/feds/2007/200720/feds200720.xls

[ken melvin]

The missing end of the link...
/feds200720.xls

[save_the_rustbelt]

Hey, when Ohio and Michigan lost jobs several years in a row it was a benefit of free trade.

I called a recession for 3rd quarter of 2007. Could be the party is over.

[Peter Schaeffer]

Evagrius,

Yes, I think it is. However, at least Brooks is honest enough to admit it.

[reason]

Re forecasting... nobody ever gets the turning points right. The ups and downs are often much sharper than anyone expects. But they do tend to be short lived. We'll see.

Re the comparison with Japan, the big difference is the external balance. It is net indebtedness, and particularly the distribution of the indebtedness that worries me wrt the US. (If it was just a few get rich quick guys I wouldn't worry, but it seems there is a whole culture of debt thing in the US).

[Globalized DOA]

I don't play the markets but I learned a lot from his blog. And he called the top of the market dead on target.

http://globaleconomicanalysis.blogspot.com/