FacebookTwitterGoogle+RedditEmail

Recession Looms

Today, the Labor Department reported the economy lost 17,000 payroll jobs in January. These poor jobs data are the strongest evidence so far that the economic expansion is grinding to a halt.

The economy is in recession mode. This is fresh evidence that the Federal Reserve has been behind the curve. The stimulus package may ease the pain but it comes too late to head off the debacle. Much stronger action, especially with regard to deteriorating credit markets, is needed.

The Labor Department reported a slight decrease in the unemployment rate to 4.9 percent. Factoring in the decline the number of adults participating in the labor force, the unemployment rate is closer to 6.7 percent.

Weak holiday retail sales and slow automobile sales indicate high gasoline prices and the subprime crisis have slowed down consumers. The impact on the economy is exacerbated by the woes of the Detroit Three automakers. Car sales are down and continuing to shift toward smaller vehicles, which favors imports.

Rising prices for energy, metals and other materials are pushing up inflation, but the Federal Reserve can do little to curb rising prices. Robust growth in China and elsewhere in Asia are pushing up energy and raw material prices, and the Fed could only marginally affect these pressures by constraining U.S. growth.

The Federal Reserve’s aggressive interest rates cuts will have a limited effect, and the stimulus package is likely to arrive too late to head off a recession. The real value of the stimulus package will be to lessen the impact of whatever slowdown or recession the economy endures.

The Federal Reserve is in crisis, because its mix of policies addresses an old style recession, one premised on inadequate demand but solid financial institutions. This recession has its origins in questionable banking practices and a breakdown of investor trust in the integrity of Wall Street’s most venerable banks and investment houses.

The housing sector is already in recession, in large measure, because the market for mortgage-backed securities has broken down. At this time, banks can only write conforming loans that can be sold to Fannie Mae or held on their balance sheets. The bond market will not accept mortgage-backed securities underwritten by the major Wall Street banks, and this significantly curtails the market for subprime securities.

The subprime meltdown reveals fundamental structural flaws in the U.S. banking system. The write downs at Citigroup, UBS and others indicate that bankers have been overvaluing mortgage-backed securities. Mutual funds, U.S.-state run money market funds for municipalities, pension funds, insurance companies, and individual investors that trusted Citigroup and other banks now hold worthless paper. Consequently, the market for mortgage-backed securities has evaporated.

Trust is the scarcest resource on Wall Street.

The whole chain that creates financing for mortgages has been corrupted from loan officers to banks that bundle loans into securities, to bond rating agencies like Standard and Poor’s who demand payments from banks instead of charging investors to evaluate mortgage-backed securities.

The Federal Reserve and Treasury need to prod the private banks to reform lending practices, and to encourage bond rating agencies to return to investor financed ratings. Unfortunately, Henry Paulson and Ben Bernanke have been shy to do this. That is why the stock market has not been much moved by recent interest rate cuts.

Weak Wage Growth and Unemployment

Construction, manufacturing and retail trade displayed weakness, reflecting significantly slower GDP growth.

Wages increased a moderate four cents per hour, or 0.2 percent. Moderate wage and strong labor productivity growth should help keep core inflation in check, and this should help abate Federal Reserve concerns about core inflation as it navigates the fallout from the subprime crisis. What problems the Fed faces in the core will be pass through from higher energy and food prices, which its policies can little affect.

The unemployment rate was 4.9 percent in January. However, these numbers belie more fundamental weakness in the job market. Discouraged by a sluggish job market, many more adults are sitting on the sidelines, neither working nor looking for work, than when George Bush took the helm. Factoring in discouraged workers raises the unemployment rate to about to 6.7 percent. As the economy slows further this figure will likely exceed 8 or even 9 percent.

The bottom line is that labor markets remain slack enough to keep wage increases down. Productivity growth should accommodate those increases and rising energy prices, the Federal Reserve can focus on managing the credit crisis and staving off a recession, if that is possible.

Further interest rate cuts are likely.

Manufacturing, Construction and the Quality of Jobs

Going forward, the economy will add some jobs for college graduates with technical specialties in finance, health care, education, and engineering. However, for high school graduates without specialized technical skills or training, jobs offering good pay and benefits remain tough to find. For those workers, who compose about half the working population, the quality of jobs continues to spiral downward.

Historically, manufacturing and construction offered workers with only a high school education the best pay, benefits and opportunities for skill attainment and advancement. Troubles in these industries push ordinary workers into retailing, hospitality and other industries where pay often lags.

Construction employment fell by 27,000 in January. This is a terrible indicator for future GDP growth.

In December, manufacturing lost 28,000 jobs, and over the last 90 months manufacturing has shed more than 3.4 million jobs. Were the trade deficit cut in half, manufacturing would recoup at least 2 million of those jobs, U.S. growth would exceed 3.5 percent a year, household savings performance would improve, and borrowing from foreigners would decline.

The dollar remains too strong against Chinese yuan, Japanese yen and other Asian currencies. The Chinese government artificially suppresses the value of the yuan to gain competitive advantage, and the yuan sets the pattern for other Asian currencies. These currencies are critical to reducing the non-oil U.S. trade deficit, and instigating a recovery in U.S. employment in manufacturing and technology-intensive services that compete in trade.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

 

 

 

More articles by:

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

January 16, 2019
Patrick Bond
Jim Yong Kim’s Mixed Messages to the World Bank and the World
John Grant
Joe Biden, Crime Fighter from Hell
Alvaro Huerta
Brief History Notes on Mexican Immigration to the U.S.
Kenneth Surin
A Great Speaker of the UK’s House of Commons
Elizabeth Henderson
Why Sustainable Agriculture Should Support a Green New Deal
Binoy Kampmark
Trump, Bolton and the Syrian Confusion
Jeff Mackler
Trump’s Syria Exit Tweet Provokes Washington Panic
Barbara Nimri Aziz
How Long Can Nepal Blame Others for Its Woes?
Cesar Chelala
Violence Against Women: A Pandemic No Longer Hidden
Kim C. Domenico
To Make a Vineyard of the Curse: Fate, Fatalism and Freedom
Dave Lindorff
Criminalizing BDS Trashes Free Speech & Association
Thomas Knapp
Now More Than Ever, It’s Clear the FBI Must Go
Binoy Kampmark
Dances of Disinformation: The Partisan Politics of the Integrity Initiative
Edward Curtin
A Gentrified Little Town Goes to Pot
January 15, 2019
Patrick Cockburn
Refugees Are in the English Channel Because of Western Interventions in the Middle East
Howard Lisnoff
The Faux Political System by the Numbers
Lawrence Davidson
Amos Oz and the Real Israel
John W. Whitehead
Beware the Emergency State
John Laforge
Loudmouths against Nuclear Lawlessness
Myles Hoenig
Labor in the Age of Trump
Jeff Cohen
Mainstream Media Bias on 2020 Democratic Race Already in High Gear
Dean Baker
Will Paying for Kidneys Reduce the Transplant Wait List?
George Ochenski
Trump’s Wall and the Montana Senate’s Theater of the Absurd
Binoy Kampmark
Dances of Disinformation: the Partisan Politics of the Integrity Initiative
Glenn Sacks
On the Picket Lines: Los Angeles Teachers Go On Strike for First Time in 30 Years
Jonah Raskin
Love in a Cold War Climate
Andrew Stewart
The Green New Deal Must be Centered on African American and Indigenous Workers to Differentiate Itself From the Democratic Party
January 14, 2019
Kenn Orphan
The Tears of Justin Trudeau
Julia Stein
California Needs a 10-Year Green New Deal
Dean Baker
Declining Birth Rates: Is the US in Danger of Running Out of People?
Robert Fisk
The US Media has Lost One of Its Sanest Voices on Military Matters
Vijay Prashad
5.5 Million Women Build Their Wall
Nicky Reid
Lessons From Rojava
Ted Rall
Here is the Progressive Agenda
Robert Koehler
A Green Future is One Without War
Gary Leupp
The Chickens Come Home to Roost….in Northern Syria
Glenn Sacks
LA Teachers’ Strike: “The Country Is Watching”
Sam Gordon
Who Are Northern Ireland’s Democratic Unionists?
Weekend Edition
January 11, 2019
Friday - Sunday
Richard Moser
Neoliberalism: Free Market Fundamentalism or Corporate Power?
Paul Street
Bordering on Fascism: Scholars Reflect on Dangerous Times
Joseph Majerle III – Matthew Stevenson
Who or What Brought Down Dag Hammarskjöld?
Jeffrey St. Clair - Joshua Frank
How Tre Arrow Became America’s Most Wanted Environmental “Terrorist”
Andrew Levine
Dealbreakers: The Democrats, Trump and His Wall
Jeffrey St. Clair
Roaming Charges: Que Syria, Syria
Dave Lindorff
A Potentially Tectonic Event Shakes up the Mumia Abu-Jamal Case
FacebookTwitterGoogle+RedditEmail