February is the shortest month, but it was a brutal one this year: Economists are predicting that on Mar. 6, the government will report that payroll employment declined in February by the most in 60 years. The continued job losses—about 2.5 million in just four months—are evidence that the private sector is having a hard time pulling itself out of recession. Even stronger government intervention may be required, several economists said on Mar. 4. "I've gone through a number of cycles as an economist on Wall Street, but this one's different," says Brian Fabbri, chief economist for BNP Paribas. "This one's scary different."
Consumers and businesses are locked into a dysfunctional relationship, dragging each other down. Fearful and overindebted consumers are spending less, forcing businesses to cut jobs. That is causing consumers to spend even less, further squeezing businesses, and so on downward. Fabbri estimates that the unemployment rate hit 8% in February and will rise to 10.7% sometime in 2010.
Record Job Losses?
Fabbri, who says he considers himself a small-government conservative, argues that in these extreme circumstances, the only way to break the vicious cycle is for Uncle Sam to launch a massive jobs program. "What got us out of the Depression? World War II," says Fabbri. "I'm not saying we need a war to get out of this one, but we need to start the jobs engine. No one else can do it."
Until recently, economists were hoping that the 598,000 jobs lost in January would end up being the worst decline of this recession, which began in December 2007. But most now believe that February was worse, based on fresh data including the swelling number of people filing initial claims for unemployment insurance and a gloomy survey of private-sector employment by ADP (ADP). The median forecast in a Bloomberg survey of economists is that payrolls fell by 650,000 this past month. "The corporate sector is moving very preemptively" to shed jobs and cut costs, having realized that the recession is more severe than originally believed, says Lou Crandall, chief economist of Wrightson ICAP.
Only two months in U.S. history have seen bigger job losses than the ones that are estimated to have occurred in February. In September 1945, as armed forces were decommissioned after World War II, employment fell by nearly 2 million. In October 1949, a nationwide steelworkers' strike reduced total payrolls by a little more than 800,000. A decline of 650,000 would be the third-biggest absolute number. It would, however, barely crack the top 30 when measured as a percentage of total payrolls, since the economy is much bigger now than in the 1940s and 1950s.
The Role of Stimulus in Recovery
Ordinarily the U.S. economy is resilient and shrugs off recessions fairly quickly. This one is harder to shake in part because the excesses of the boom were greater and the financial system has been damaged worse. That's why many economists predict that the recession may last until the end of 2009, if not longer. And employment usually keeps falling even after output begins to grow because employers remain nervous about the recovery's durability.
Government will probably have to play a major role in getting the private sector functioning again, say Fabbri, Crandall, and other economists. It's already doing a lot, of course. The Federal Reserve has cut short-term interest rates essentially to zero, and the Obama Administration is pouring hundreds of billions of dollars into economic stimulus and repairing the crippled financial system. The question is whether the treatment will work quickly enough. Much of the infrastructure spending in the Obama stimulus plan doesn't hit until 2010, and efforts to buy toxic assets from banks to clean up their balance sheets are moving slowly as well.
Dean Maki, co-head of U.S. economic research at Barclays Capital (BCS), is more optimistic than some other economists, predicting that the economy will begin growing in the fourth quarter of 2009 and the unemployment rate will top out that quarter at around 9%. He says the government is already managing to dampen the vicious cycle of cutting by consumers and businesses through transfer payments. Bigger Social Security checks and smaller payroll tax withholding are buoying incomes, helping the consumer sector keep spending despite job losses, Maki says. Certainly, says Maki, "recovery would take longer without the government stimulus."
Coy is BusinessWeek's Economics editor.