The unemployment data for the US continues to provide unpleasant surprises. Although it is generally anticipated that things will get worse before they get better, the numbers are quite disconcerting. Over 600,000 jobs have been lost each month for three consecutive months, with the unemployment rate climbing to 8.1 per cent in February, a rate that the government had anticipated would be the average for the entire year. This takes the total number of jobs lost since December 2007, when the recession is deemed to have begun, to about 4.4 million. With many large corporations in several sectors showing signs of extreme financial stress, there is little question that the numbers will increase further over the next few months. There are legitimate fears of double-digit unemployment, something last seen during the 1982-83 recession. To the extent that the US has the world’s largest economy and therefore that American economic trends affect everyone else, this is bad news for the world as a whole.
The reasons for the continuing slide are obvious. Demand is sluggish, causing firms across the board to cut production. Typically, in the manufacturing sector, production cuts lag behind sales declines because producers initially replenish inventories. This is, of course, helped by soft interest rates, as the central bank cuts rates to provide a stimulus. However, with the state that the US financial system is currently in, credit is extremely hard to come by. With no lending, inventory replenishment cannot take place, leading to sharper than otherwise production cuts. This explains both the sharply decelerating growth rate and the rapidly rising unemployment rate. This pattern will obviously continue until credit begins to flow again, which itself is dependent on how quickly the various policy options that have been proposed or being are being considered — the bad assets bank, nationalisation of banks, etc — get operationalised.
Logically, the increasing unemployment rate should result in a reduction in consumer spending, as even people with jobs begin to save more in anticipation of losing them. Somewhat surprisingly, though, the data on consumer spending runs counter to this logic. Spending actually rose in January, albeit by a modest rate of 0.4 per cent in real terms. This upturn was also reflected in retail sales, which grew by 1 per cent. These were the first reversals after six continuous months of declines, most notably during the Christmas shopping season, which was particularly dismal in 2008. The counter-intuitive pattern in spending is being attributed mainly to lower personal tax liabilities as incomes have fallen and it is certainly not seen as reflecting the bottom of the business cycle. The logic of higher unemployment leading to lower consumer spending is unanimously expected to prevail in the coming months, as this one-time tax effect subsides. When this happens, the spiral will continue with, of course, significant consequences for the Asian region, exports from which cater heavily to US consumers.
The Obama administration appears to have run into some rough weather on its economic agenda. The stimulus package has been criticised as being not large enough and wrongly targeted by even some staunch supporters of the president. As the bad news continues to break, even if much of it is anticipated, the pressure on the government to pull more rabbits out of its hat will mount. Everybody realises that the core of the problem is in the financial system, but consensus on a bold solution remains elusive. Time is running out, with dire consequences for the US and for the rest of the world.
