BusinessWeek asked economists from Wall Street to academia. Their job forecasts all depend on when they think the credit markets will start working again
It was bad enough when Iceland got into financial trouble and practically sank into the frigid North Atlantic. It was worse when your next-door neighbor lost his home to foreclosure. But now things are really getting scary: Your own job may be at risk.
Unease turned to incipient panic on Dec. 5 after the government reported that the U.S. economy lost 533,000 jobs in November, making it the worst month for employment since the grim days of December 1974. The holiday party chatter is all about layoffs. Everyone wants to know how long the jobs hemorrhage will last and how bad it will get.
Forecasting job losses is incredibly difficult because a lot depends on when banks finally get back to the business of providing credit. The recent news on that score is not good. On Dec.9 the Treasury Dept. auctioned one-month bills at 0.00%—evidence that risk aversion among potential financiers is more extreme than ever. "We've got so far to climb out of this [financial] hole that if we start today, then on any reasonable time path we might still be climbing out a year from now," says Robert V. DiClemente, chief U.S. economist of Citigroup (C) in New York. Predicts the AFL-CIO's chief economist, Ron Blackwell: "Things will get worse, perhaps much worse, before they get better."
That said, this job bust won't last forever. There are forces at play that will eventually pull the economy out of its free fall. The key is smart government policy that sets politics aside. It must provide a combination of short-term consumer stimulus and long-term investments without stepping over the line into wasteful and innovation-stifling industrial policy.
BusinessWeek asked top economists from Wall Street, academia, labor, and business, and got a wide range of predictions for what lies ahead. The optimists see job growth as soon as spring, with the economy losing only about 750,000 more jobs between now and then. The pessimists predict the economy will keep losing jobs until late next year or 2010, with additional losses of well over 2million jobs, bringing the peak-to-trough decline to more than 4million. All of the forecasts take into account President-elect Barack Obama's pledge to "save or create" 2.5million jobs—implying that these predictions would be even more dire if no additional stimulus were planned.
The quick-snapback scenario assumes a reasonably healthy financial sector. If the financial system keeps struggling, though, the spiral will continue: Cash-strapped companies will be forced to step up layoffs, causing cutbacks in consumer spending that will push employers to cut even more jobs. "I've been cautioning everybody that as long as financial conditions are as impaired as they are, questions about when the job market will hit bottom are premature," says Citigroup's DiClemente.
Much depends on Washington's effectiveness in sustaining demand as the credit crunch unwinds. Keynesian economics is back in fashion for the first time since the Kennedy Administration. Republicans as well as Democrats have glommed onto the idea that massive government outlays during a recession is a good thing because it props up spending for goods and services while the private sector catches its breath. Many economists believe the President-elect's plan for $500billion or more in stimulus could dramatically shorten the recession and reduce job losses.
But the Obama Administration has to balance the short term with the long term. It needs a plan that will produce a robust rebound in private-sector employment once the recession ends. Propping up zombie companies and household borrowers won't do it.
Remember, the recession isn't all bad: Unsupportable debts are being erased. Consumers are rebuilding their savings and lowering their living standards to match reality. Workers are exiting dying industries. And through distress sales, foreclosures, and bankruptcies, assets are being taken away from weak hands and given to strong ones, creating the conditions for future growth.
The smart play for Obama's team is to use public works, bailouts, and such to break the feedback loop of falling employment to give the economy's natural stabilizing forces time to work. Yes, public investment is good. But restoring confidence to businesses about future prospects will trigger private investments in plant and equipment that are far larger than the government itself is ever likely to make.
What's indisputable is that things are really bad right now. The 1.9million decrease in jobs since last December's peak is already close to the 2.2million jobs lost in the 1973-75 downturn and again in the back-to-back recessions of 1980-1982.
Today's overall unemployment rate, at 6.7%, is not quite as bad as in some past recessions. But some groups are already being pounded hard. Unemployment in construction and extraction occupations (such as mining) hit 12.1% in November, followed by 9.4% in production occupations. Unemployment rates in November ranged from 5% for white adult women to 32% for black teenagers. Lawrence Mishel, president of the progressive Economic Policy Institute, says black teen joblessness could hit 60% to 70%. Says Mishel: "We're talking about communities that live in a recession in the best of times going into a deep depression."
Where economists stand on the future of jobs seems to depend at least a little on where they sit. In BusinessWeek's unscientific sample, the forecasters who were most optimistic about the overall economy came from the relatively healthy small-business sector (the National Federation of Independent Business) or from outside New York (Wells Capital Management Chief Investment Strategist James W. Paulsen of Minneapolis, where the October unemployment rate was just 5.3%). Gloomiest were Citigroup and Goldman Sachs (GS), which are at the epicenter of the financial crisis. Michael P. Niemira, chief economist of the International Council of Shopping Centers, a group that has been hit hard by consumer cutbacks, predicts 3.5 million in total job losses.
History shows that the sectors that remain relatively strong during a recession tend to lead on the way back out. But it doesn't always happen quickly. Job growth was agonizingly slow after the recessions of 1990-91 and 2001. In fact, the U.S. lost jobs in August 2003, more than a year and a half after the end of the 2001 downturn. That bodes ill for a quick bounceback this time, especially if the economy is continuing to work off its leverage binge.
On the other hand, optimists say the fear seizing the markets could abruptly abate. Thanks to Federal Reserve intervention, the banking system is supercharged with excess reserves. If the banks' mood improves, consumers could quickly get access to loans to feed pent-up demand for cars, houses, and other goods, says Wells Capital Management's Paulsen. That would create jobs fast. "Right now companies, even if they're doing well, are saying, 'Hey, wait a minute. Let's not hire anybody for a while.' They could change their minds quickly," he says.
Another reason for hope is that companies have been slashing jobs more aggressively than in past downturns to get out ahead of the problem, which means that if demand comes back they will need to rehire in a hurry. Corporate boards are asking managers: "Why aren't you downsizing in preparation for what's coming?" says Garry G. Mathiason, a senior partner at Littler Mendelson, a large employment law firm. On Dec.8, 3M Chief Financial Officer Patrick D. Campbell said the company was cutting 2,300 jobs this quarter as part of "proactively reducing structure in a slower-growth world."
The fiscal stimulus being planned by the Obama team is so massive that, if it goes into effect as conceived, it could make things considerably better than some of the more pessimistic analysts are currently projecting. On Dec. 11, United Auto Workers President Ron Gettelfinger renewed his pitch for the auto industry to get a piece of the stimulus "to keep America's factories up and running."
Whether or not Detroit deserves a bailout, it's clear that revving the economy can't be all about propping up failing industries. Policy also shouldn't over-rely on infrastructure investment. In the name of making the economy more productive, Obama plans to invest heavily in roads and bridges, energy efficiency, school buildings, broadband networks, and electronic medical record-keeping. The idea is to grow through investment rather than consumption. Some economists, though, are skeptical of the Obama team's emphasis on infrastructure, arguing that there aren't enough out-of-work construction workers to do all the jobs that are envisioned.
Here's the hitch: Employment in heavy and civil engineering construction is down by only 75,000 (or 7%) from November 2007—and 2007 was a record year for jobs in that sector. Unemployed ad salespeople are unlikely to start pouring concrete for a living.
The more the government involves itself in how the money will be spent, the more the program resembles industrial policy rather than fiscal stimulus. In contrast, tax credits and rebates such as the program pushed through by the Bush Administration earlier this year tend to create the types of jobs that people already know how to do. For example, tax rebates that boost retail spending will create more jobs for unemployed sales clerks, drivers, and marketers.
There's a good case for putting some of the stimulus money directly into consumers' pockets through measures such as extending unemployment benefits and perhaps temporarily cutting payroll taxes.
No matter what government does, the bleeding in the labor market is far from over. But getting policy right can make an enormous difference in how soon the healing begins.
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Paul Krugman began warning about a U.S. recession in December 2006, a year before it officially began. On Dec. 8 the Princeton economist and New York Times columnist was awarded the 2008 Nobel prize for economics for his work on new trade theory. In his speech in Stockholm, Krugman said "manufacturing is not in a good way . . . at least not in the U.S." He said the carmaking belt around Detroit has been "dissolving" since the '60s.
To view Krugman's presentation, go to http://bx.businessweek.com/global-economy/reference/.
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