We are facing the possibility of not a "jobless" recovery but a "JOB LOSS" recovery. Possibly a new normal for low economic growth and high structural unemployment. But policy makers in Washington, particularly in the White House, are silent on what to do about this state of economic purgatory. And it could be that they decided that nothing needs to be done or nothing politically can be done. Both are big mistakes.
There were three speeches within that last several days by three Federal Reserve Bank Presidents that all indicate a not to bright economic outlook (HT Calculated Risk). First, Dennis Lockhart, President of Federal Reserve Bank of Atlanta, while his overall assessment of the economy is that it's recovering there are these major qualifiers:
A second reason to strike a note of caution about the economic picture is that both the data and anecdotal descriptions of ground-level reality are quite mixed. Data on foreclosures, unemployment, personal income, and bank failures continue to disappoint. Also, nonresidential construction continues to decline, and state and local government budgets remain severely constrained.
Along with my colleagues at the Atlanta Fed, I spend a lot of my time asking business contacts about industry conditions and the outlook for their businesses. In recent soundings we've heard frequently about weak top-line sales, continuing inventory liquidation, reticence regarding capital expenditures, and reluctance to hire.
And then he adds this troubling point regarding the horrible commercial real estate market:
Today, I'm particularly concerned about the interaction among bank lending, small business employment, and CRE values.
To elaborate, there is a tight linkage between CRE values and jobs. In a mid-September conference at the Atlanta Fed, CRE practitioners, investors, and academics agreed that the evolution of the CRE picture will depend greatly on the path of employment.......
Let me go on to show the link between jobs and small business credit. During the last two economic expansions, small firms (those with fewer than 50 employees) contributed about one-third of net job growth. But the depth and duration of this recession have taken a substantial toll on small businesses. In the 2001 recession, small firms held up reasonably well and accounted for only 9 percent of net job loss. In this recession, however, small firms have accounted for about 45 percent of net job losses per our most recent data through the end of 2008.
Small businesses tend to depend greatly on the banking sector—especially community and regional banks—for financing. A Federal Reserve survey earlier in the decade showed that more than half of smaller firms had a credit line or loan with a bank. In addition, about half of these businesses used a personal or business credit card to finance working capital. In this recession, credit standards have tightened for all businesses, including small businesses.
At this juncture, it's hard to be encouraged about a fast rebound in job growth. As you know, last week's employment report pushed the official unemployment rate to 10.2 percent, the highest since May 1983. Net job losses continue on a monthly basis but at a declining pace. Because employment growth tends to lag recovery from a recession and because of factors such as small business credit constraints, my current outlook for employment is one of very slow net job gains once the trend reverses, in all likelihood sometime next year. If this view is correct, this job growth outlook doesn't help the commercial real estate situation.
Towards the end of his remarks he establishes a linkage between small business credit, community and regional banks and the commercial real estate crisis:
However, I am concerned about the potential impact of CRE on the broader economy. Unlike residential real estate, there is not the same direct linkage from CRE to household wealth—and therefore consumption—caused by erosion of home equity. However, there could be an impact resulting from small banks' impaired ability to support the small business sector—a sector I expect will be critically important to job creation.
To add some detail: At the end of June 2009 there was approximately $3.5 trillion of outstanding debt associated with CRE. This figure compares with about $11 trillion of residential debt outstanding.
About 40 percent of the CRE debt is held on commercial bank balance sheets in the form of whole loans. A lot of the CRE exposure is concentrated at smaller institutions (banks with total assets under $10 billion). These smaller banks account for only 20 percent of total commercial banking assets in the United States but carry almost half of total CRE loans (based on Bank Call Report data).
Many small businesses rely on these smaller banks for credit. Small banks account for almost half of all small business loans (loans under $1 million). Moreover, small firms' reliance on banks with heavy CRE exposure is substantial. Banks with the highest CRE exposure (CRE loan books that are more than three times their tier 1 capital) account for almost 40 percent of all small business loans.
The second Federal Reserve President who spoke yesterday was Janet Yellen, President of the Federal Reserve Bank of San Francisco. Dr. Yellen also offers some very cautionary notes about our economic purgatory:
The big issue is how strong the upturn will be. With such enormous reservoirs of slack in the form of high unemployment and idle productive capacity, we need a strong rebound to put unemployed people back to work and get underutilized factories, offices, and stores humming again. Unfortunately, my own forecast envisions a less-than-robust recovery for several reasons. As the impetus from government programs and inventories diminishes in the quarters ahead, private final demand will have to fill the breach. The danger is that demand may grow at too anemic a pace to support vigorous expansion.
Weakness in the labor market is another factor that may keep the recovery sluggish for quite some time. Payroll employment has been plummeting for more than a year and a half, and, even though the pace of the decline has slowed, unemployment now stands at its highest level since 1983. In addition, many workers have seen their hours cut or are experiencing involuntary furloughs. To bolster earnings in the face of weak revenue growth, employers have been aggressive in cutting labor costs and jobs, and my business contacts say they will be reluctant to hire again until they see clear evidence of a sustained recovery. Weak demand for workers is also putting a lid on paychecks. Wages are barely rising. A well-known measure of overall employment costs rose by only 1¼ percent over the past year, the smallest increase in the history of the series. High unemployment, weak job growth, and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery.
The U.S. experienced so-called jobless recoveries following the previous two recessions in 1991 and 2001, when job creation remained weak for several years following the business cycle trough. In both cases, output growth was less robust than in the typical recovery and, unfortunately, things seem to be shaping up similarly this time around.
If we are in an economic recovery it sure the hell doesn't fell like it. If we are in a recovery then we are currently in a state of a JOB LOSS recovery. We lost 190,000 jobs in October.
Finally, from a speech by Richard Fisher, President of the Federal Reserve Bank of Dallas:
It may be some time before significant job growth occurs and even longer before we see meaningful declines in the unemployment rate.
It will take some time, in my opinion, to get back on a steady pathway to a pace of growth that will result in significant job creation. We are in for a long slog. We had a snapback in growth in the third quarter and can expect that will continue in the current quarter. But looking into 2010 and perhaps to 2011, the most likely outcome is for growth to be suboptimal, unemployment to remain a vexing problem and inflation to remain subdued.
So there you have it. Three separate Fed President's. Three separate speeches. All very concerned about job growth (or lack of it) and unemployment. Oh, but there is more but not from a Federal Reserve President, but from an economics professor. Jeffrey Sachs, wrote a piece today for the Financial Times titled "Obama Has Lost His Way on Jobs," and he makes some great points and offers some suggestions:
The past week brought news of US double-digit unemployment and the Federal Reserve’s decision to maintain near-zero interest rates. Both pieces of news expose the inadequacy of US economic policymaking. The Obama administration’s stimulus policies are not well-targeted. The Republican alternatives are even worse. Both sides are missing the key fact: the US economy needs structural change that requires a new set of economic tools.
Yes, Yes, Yes, much needed structural change. But, what we have seen from the Obama Administration is certainly not innovative or even bold:
Following a Keynesian approach, the Obama administration has focused on restoring consumer spending. They have gone about this with a combination of near-zero interest rates, massive Fed financing of mortgages and various consumption incentives, such as rebates for new homebuyers and cash for clunkers.
During the previous bubble, the US consumer was encouraged to over-borrow. Recreating a new bubble is like offering just one more drink, on the government’s account, to overcome a mass hangover. With budget deficits of about 10 per cent of gross domestic product, government spending needs to be far more consequential than temporary boosts to consumer spending.
Prof. Sachs offers three long-term solutions:
1) Promote greater exports, partly through dollar depreciation (already happening) and partly through expanded government support for export financing particularly to credit constrained low income countries;
2) Massive expansion of education spending and job training; and
3) Spur investment in areas of high social return such as low-carbon economy or green technology.
Yes, politics is the art of the possible. But leadership is the art of expanding the possible. Leadership without politics is futile. But politics without leadership is blind.