The Mistake of 2010

June 3, 2011

By
Published: June 2, 2011

 

Earlier this week, the Federal Reserve Bank of New York published a blog post about the “mistake of 1937,” the premature fiscal and monetary pullback that aborted an ongoing economic recovery and prolonged the Great Depression. As Gauti Eggertsson, the post’s author (with whom I have done research) points out, economic conditions today — with output growing, some prices rising, but unemployment still very high — bear a strong resemblance to those in 1936-37. So are modern policy makers going to make the same mistake?

Fred R. Conrad/The New York Times

Paul Krugman

Mr. Eggertsson says no, that economists now know better. But I disagree. In fact, in important ways we have already repeated the mistake of 1937. Call it the mistake of 2010: a “pivot” away from jobs to other concerns, whose wrongheadedness has been highlighted by recent economic data.

To be sure, things could be worse — and there’s a strong chance that they will, indeed, get worse.

Back when the original 2009 Obama stimulus was enacted, some of us warned that it was both too small and too short-lived. In particular, the effects of the stimulus would start fading out in 2010 — and given the fact that financial crises are usually followed by prolonged slumps, it was unlikely that the economy would have a vigorous self-sustaining recovery under way by then.

By the beginning of 2010, it was already obvious that these concerns had been justified. Yet somehow an overwhelming consensus emerged among policy makers and pundits that nothing more should be done to create jobs, that, on the contrary, there should be a turn toward fiscal austerity.

This consensus was fed by scare stories about an imminent loss of market confidence in U.S. debt. Every uptick in interest rates was interpreted as a sign that the “bond vigilantes” were on the attack, and this interpretation was often reported as a fact, not as a dubious hypothesis.

For example, in March 2010, The Wall Street Journal published an article titled “Debt Fears Send Rates Up,” reporting that long-term U.S. interest rates had risen and asserting — without offering any evidence — that this rise, to about 3.9 percent, reflected concerns about the budget deficit. In reality, it probably reflected several months of decent jobs numbers, which temporarily raised optimism about recovery.

But never mind. Somehow it became conventional wisdom that the deficit, not unemployment, was Public Enemy No. 1 — a conventional wisdom both reflected in and reinforced by a dramatic shift in news coverage away from unemployment and toward deficit concerns. Job creation effectively dropped off the agenda.

So, here we are, in the middle of 2011. How are things going?

Well, the bond vigilantes continue to exist only in the deficit hawks’ imagination. Long-term interest rates have fluctuated with optimism or pessimism about the economy; a recent spate of bad news has sent them down to about 3 percent, not far from historic lows.

And the news has, indeed, been bad. As the stimulus has faded out, so have hopes of strong economic recovery. Yes, there has been some job creation — but at a pace barely keeping up with population growth. The percentage of American adults with jobs, which plunged between 2007 and 2009, has barely budged since then. And the latest numbers suggest that even this modest, inadequate job growth is sputtering out.

So, as I said, we have already repeated a version of the mistake of 1937, withdrawing fiscal support much too early and perpetuating high unemployment.

Yet worse things may soon happen.

On the fiscal side, Republicans are demanding immediate spending cuts as the price of raising the debt limit and avoiding a U.S. default. If this blackmail succeeds, it will put a further drag on an already weak economy.

Meanwhile, a loud chorus is demanding that the Fed and its counterparts abroad raise interest rates to head off an alleged inflationary threat. As the New York Fed article points out, the rise in consumer price inflation over the past few months — which is already showing signs of tailing off — reflected temporary factors, and underlying inflation remains low. And smart economists like Mr. Eggerstsson understand this. But the European Central Bank is already raising rates, and the Fed is under pressure to do the same. Further attempts to help the economy expand seem out of the question.

So the mistake of 2010 may yet be followed by an even bigger mistake. Even if that doesn’t happen, however, the fact is that the policy response to the crisis was and remains vastly inadequate.

Those who refuse to learn from history are condemned to repeat it; we did, and we are. What we’re experiencing may not be a full replay of the Great Depression, but that’s little consolation for the millions of American families suffering from a slump that just goes on and on.

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Written by Jon Ward as reported in Huffington Post

WASHINGTON — The big numbers from Paul Ryan’s budget: It will reduce spending by $6.2 trillion over the next decade and reduce the deficit by $4.4 trillion.

It also cuts the top income tax rate by nearly a third, from 35 percent to 25 percent.

A big part of the House Budget Chairman’s plan rests on the assumption that President Barack Obama’s health care law will be repealed. Over the next decade, that would cut $1.4 trillion in spending alone, according to Ryan’s budget. Those savings, however, wouldn’t go directly to deficit reduction, because Ryan would also repeal the elements of health care reform that are aimed at raising revenue or reducing costs.

The Wisconsin Republican’s budget spends less on nearly every major category of the budget. Over the next decade, Ryan (R-Wis.) wants to cut $389 billion from Medicare, the public health insurance program for seniors. Over the same period, Ryan’s budget puts $735 billion less toward Medicaid, which benefits Americans too poor to afford private insurance. Discretionary spending on domestic programs is also reduced by $923 billion.

Two exceptions are security and defense spending and spending on Social Security, the public pension program for the elderly. Both are kept steady and relatively unchanged from Obama’s proposed budget.

A draft proposal from Ryan’s House Budget Committee says that under his plan, the national debt would be $1.1 trillion less than it would be over the next five years under Obama’s budget, and would add $3 trillion less to the debt than Obama’s budget proposal over the next decade. Ryan’s budget proposal would bring the debt held by the public to $13.9 trillion by 2016 and $16 trillion by 2021, compared to $15 trillion in 2016 and $19 trillion in 2021 under the president’s proposal. (The full national debt of just over $14 trillion also includes money owed to the Social Security and Medicare trust funds, but the public figure is the one normally used for budget forecasts.)

Though Ryan’s plan would reduce the size of the national debt as a portion of the economy – which is the key factor when considering the country’s obligations to creditors – the addition of new debt in the short term shows the gap between talk of not raising the debt ceiling by many Republicans and fiscal reality.

Ryan’s plan has $40 trillion in spending over the next 10 years compared to $34.9 trillion in revenues. Obama would spend $46 trillion in the coming decade while bringing in $38.8 trillion in revenues. So Ryan’s plan would still result in the government spending $5.1 trillion more over the next decade than it brings in, but that’s less than the $7.2 trillion in deficit spending that Obama has proposed.

The most fundamental difference between the competing budget proposals is seen in the way they envision the size of government’s imprint in the economy, as measured by spending and revenues as a percentage of gross domestic product.

Obama’s budget plan would take spending as a percentage of gross domestic product (GDP), the total economic output of the American economy, from 25.3 percent this year to the 22 percent range for much of the next decade. But by the end of the 10 year horizon, his plan has spending back at 23 percent. Revenues, meanwhile, which are currently at an anemic 14.4 percent, would creep up to 19 percent by 2015 and then hit 20 percent in 2021.

It would be the highest amount of government spending since World War II. During the 12-year presidency of Franklin Delano Roosevelt, spending went from 8 percent of GDP to 41 percent, driven by FDR’s New Deal but even more so by war spending.

During Harry Truman’s administration, spending was cut in half, from 41 percent of GDP down to 20 percent, and went down further to 18 percent under Dwight Eisenhower. It stayed at 18 percent of GDP through the John F. Kennedy presidency, crept up to 19 percent under Lyndon Johnson, and then went up to 20 percent while Richard Nixon was in the White House. Gerald Ford brought spending back down to 19 percent of GDP, it then went up to 22 percent during Jimmy Carter’s term, down to 21 percent under Ronald Reagan’s two terms and George H.W. Bush’s four years as commander in chief. Bill Clinton brought spending back down to 18 percent of the U.S. economy.

No president since FDR has increased spending as a percentage of GDP by more than George W. Bush, taking it from 18.4 percent of GDP to 22.8 percent.

Obama’s budget does not show what happens beyond the 10-year window. So, compared to George W. Bush’s spending, he seems to be about on par. However, projections from the Congressional Budget Office (CBO) show spending growing at its current pace will grow to more than 26 percent of GDP in 2022, over 32 percent of GDP in 2030, 38 percent of GDP in 2040, and 45 percent of GDP by 2050, with the bulk of that spending driven by ever-rising health care costs.

Revenues under CBO projections would not move above 19 percent of GDP, leading to a gap between spending and revenues that would be difficult to sustain.

Ryan said a computer simulation program of what would happen in the future “crashes in 2037, because it can’t conceive of any way in which the U.S. economy can continue because of this massive burden of debt.”

Ryan’s plan would move spending back to historic levels, keeping it at 20 percent of GDP through 2030, and actually reducing it to under 19 percent by 2040. Ryan’s plan predicts revenues growing to 19 percent of GDP by 2040, allowing the national debt to be reduced over time.

The proposal landed in the middle of a busy news cycle where Washington is consumed with a spending fight over the current fiscal year budget, a much smaller portion of government spending that nonetheless will shut down the federal government if it is not resolved by Friday.

“Right now we’ve got some business in front of us that needs to be done,” Obama told reporters Tuesday afternoon, declining to respond to Ryan’s budget.

The reaction to Ryan’s plan was predictably split along ideological lines, though even those who supported the broad contours of Ryan’s plan did not embrace it in all its detail.

Robert Borosage, co-director of the liberal Campaign for America’s Future, delivered the harshest rebuke of the day to Ryan’s plan.

“This is being hailed as courageous. It isn’t courageous; it is corrupt,” Borosage said in a statement.

“Rep. Paul Ryan’s budget plan will push rising health care costs onto those least able to afford them – the elderly, the disabled and the poor,” Borosage said. “It will do nothing to curb the rising costs imposed by the powerful complexes – insurance and drug companies, private hospitals – that now force Americans to pay twice per capita of any other industrial nation for worst results.”

Rep. Chris Van Hollen, the Maryland Democrat who is Ryan’s foil as the Budget Committee’s ranking member, said the plan was a “lopsided approach” to deficit reduction that took too much from the disadvantaged and elderly in order to benefit wealthy Americans and big business.

“Behind the sunny rhetoric of reform, the Republican Budget represents the rigid ideological agenda that extends tax cuts to the rich and powerful at the expense of the rest of America – except this time on steroids,” Van Hollen said in a statement.

However, David Walker, the former U.S. comptroller general and founder of the Comeback America Initiative who is generally a fiscal hawk, said Ryan “should be commended for having the courage to lead in connection with our nation’s huge deficit and debt challenges.”

“His budget proposal recognizes that restoring fiscal sustainability will require tough transformational changes in many areas, including spending programs and tax policies,” Walker said.

Among the 2012 Republican presidential hopefuls, only former Minnesota Gov. Tim Pawlenty was quick to comment on Ryan’s plan.

“Thanks to Paul Ryan in Congress, the American people finally have someone offering real leadership in Washington,” Pawlenty said, but he otherwise steered clear of the details and focused on the coming fight over the debt ceiling.

“President Obama has failed to lead and make tough choices his entire time in the White House. While the budget is going to be debated for several months to come, the more immediate issue we face is President Obama’s plans to raise the debt ceiling next month. That’s a really bad idea,” Pawlenty said in a statement.

“With over $14 trillion debt already, we should not allow Washington’s big spenders to put us further in the hole. We must get our fiscal house in order with real spending cuts and with real structural reforms that stop the spending spree before it bankrupts our country,” he said.

Even the conservative Heritage Foundation, which heralded Ryan’s plan as “a monumental budget proposal for monumental times,” dinged it for insufficient levels of defense spending and for not addressing Social Security.

By

Robert Reich

Why aren’t Americans being told the truth about the economy? We’re heading in the direction of a double dip — but you’d never know it if you listened to the upbeat messages coming out of Wall Street and Washington.

Consumers are 70 percent of the American economy, and consumer confidence is plummeting. It’s weaker today on average than at the lowest point of the Great Recession.

The Reuters/University of Michigan survey shows a 10 point decline in March — the tenth largest drop on record. Part of that drop is attributable to rising fuel and food prices. A separate Conference Board’s index of consumer confidence, just released, shows consumer confidence at a five-month low — and a large part is due to expectations of fewer jobs and lower wages in the months ahead.

Pessimistic consumers buy less. And fewer sales spells economic trouble ahead.

What about the 192,000 jobs added in February? (We’ll know more Friday about how many jobs were added in March.) It’s peanuts compared to what’s needed. Remember, 125,000 new jobs are necessary just to keep up with a growing number of Americans eligible for employment. And the nation has lost so many jobs over the last three years that even at a rate of 200,000 a month we wouldn’t get back to 6 percent unemployment until 2016.

But isn’t the economy growing again — by an estimated 2.5 to 2.9 percent this year? Yes, but that’s even less than peanuts. The deeper the economic hole, the faster the growth needed to get back on track. By this point in the so-called recovery we’d expect growth of 4 to 6 percent.

Consider that back in 1934, when it was emerging from the deepest hole of the Great Depression, the economy grew 7.7 percent. The next year it grew over 8 percent. In 1936 it grew a whopping 14.1 percent.

Add two other ominous signs: Real hourly wages continue to fall, and housing prices continue to drop. Hourly wages are falling because with unemployment so high, most people have no bargaining power and will take whatever they can get. Housing is dropping because of the ever-larger number of homes people have walked away from because they can’t pay their mortgages. But because homes the biggest asset most Americans own, as home prices drop most Americans feel even poorer.

There’s no possibility government will make up for the coming shortfall in consumer spending. To the contrary, government is worsening the situation. State and local governments are slashing their budgets by roughly $110 billion this year. The federal stimulus is ending, and the federal government will end up cutting some $30 billion from this year’s budget.

In other words: Watch out. We may avoid a double dip but the economy is slowing ominously, and the booster rockets are disappearing.

So why aren’t we getting the truth about the economy? For one thing, Wall Street is buoyant — and most financial news you hear comes from the Street. Wall Street profits soared to $426.5 billion last quarter, according to the Commerce Department. (That gain more than offset a drop in the profits of non-financial domestic companies.) Anyone who believes the Dodd-Frank financial reform bill put a stop to the Street’s creativity hasn’t been watching.

To the extent non-financial companies are doing well, they’re making most of their money abroad. Since 1992, for example, G.E.’s offshore profits have risen $92 billion, from $15 billion (which is one reason it pays no U.S. taxes). In fact, the only group that’s optimistic about the future are CEOs of big American companies. The Business Roundtable’s economic outlook index, which surveys 142 CEOs, is now at its highest point since it began in 2002.

Washington, meanwhile, doesn’t want to sound the economic alarm. The White House and most Democrats want Americans to believe the economy is on an upswing.

Republicans, for their part, worry that if they tell it like it is Americans will want government to do more rather than less. They’d rather not talk about jobs and wages, and put the focus instead on deficit reduction (or spread the lie that by reducing the deficit we’ll get more jobs and higher wages).

I’m sorry to have to deliver the bad news, but it’s better you know.

This Is Not a Recovery

August 27, 2010

By PAUL KRUGMAN  NY Times Op-Ed Colmnist
Published: August 26, 2010What will Ben Bernanke, the Fed chairman, say in his big speech Friday in Jackson Hole, Wyo.? Will he hint at new steps to boost the economy? Stay tuned.
Fred R. Conrad/The New York Times

But we can safely predict what he and other officials will say about where we are right now: that the economy is continuing to recover, albeit more slowly than they would like. Unfortunately, that’s not true: this isn’t a recovery, in any sense that matters. And policy makers should be doing everything they can to change that fact.

The small sliver of truth in claims of continuing recovery is the fact that G.D.P. is still rising: we’re not in a classic recession, in which everything goes down. But so what?

The important question is whether growth is fast enough to bring down sky-high unemployment. We need about 2.5 percent growth just to keep unemployment from rising, and much faster growth to bring it significantly down. Yet growth is currently running somewhere between 1 and 2 percent, with a good chance that it will slow even further in the months ahead. Will the economy actually enter a double dip, with G.D.P. shrinking? Who cares? If unemployment rises for the rest of this year, which seems likely, it won’t matter whether the G.D.P. numbers are slightly positive or slightly negative.

All of this is obvious. Yet policy makers are in denial.

After its last monetary policy meeting, the Fed released a statement declaring that it “anticipates a gradual return to higher levels of resource utilization” — Fedspeak for falling unemployment. Nothing in the data supports that kind of optimism. Meanwhile, Tim Geithner, the Treasury secretary, says that “we’re on the road to recovery.” No, we aren’t.

Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility.

In the case of the Fed, admitting that the economy isn’t recovering would put the institution under pressure to do more. And so far, at least, the Fed seems more afraid of the possible loss of face if it tries to help the economy and fails than it is of the costs to the American people if it does nothing, and settles for a recovery that isn’t.

In the case of the Obama administration, officials seem loath to admit that the original stimulus was too small. True, it was enough to limit the depth of the slump — a recent analysis by the Congressional Budget Office says unemployment would probably be well into double digits now without the stimulus — but it wasn’t big enough to bring unemployment down significantly.

Now, it’s arguable that even in early 2009, when President Obama was at the peak of his popularity, he couldn’t have gotten a bigger plan through the Senate. And he certainly couldn’t pass a supplemental stimulus now. So officials could, with considerable justification, place the onus for the non-recovery on Republican obstructionism. But they’ve chosen, instead, to draw smiley faces on a grim picture, convincing nobody. And the likely result in November — big gains for the obstructionists — will paralyze policy for years to come.

So what should officials be doing, aside from telling the truth about the economy?

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

The administration has less freedom of action, since it can’t get legislation past the Republican blockade. But it still has options. It can revamp its deeply unsuccessful attempt to aid troubled homeowners. It can use Fannie Mae and Freddie Mac, the government-sponsored lenders, to engineer mortgage refinancing that puts money in the hands of American families — yes, Republicans will howl, but they’re doing that anyway. It can finally get serious about confronting China over its currency manipulation: how many times do the Chinese have to promise to change their policies, then renege, before the administration decides that it’s time to act?

Which of these options should policy makers pursue? If I had my way, all of them.

I know what some players both at the Fed and in the administration will say: they’ll warn about the risks of doing anything unconventional. But we’ve already seen the consequences of playing it safe, and waiting for recovery to happen all by itself: it’s landed us in what looks increasingly like a permanent state of stagnation and high unemployment. It’s time to admit that what we have now isn’t a recovery, and do whatever we can to change that situation.

Written By Arthur Delaney   reported on Huffingtonpost.com

The U.S. economy lost 467,000 jobs in June as the national unemployment rate rose to 9.5 percent, the government announced on Thursday morning. While that’s only one-tenth of a percentage point from May, the current rate is the highest rate in 26 years.

Heidi Shierholz, an economist with the Economic Policy Institute, said that the loss of 6.5 million jobs since the start of the recession combined with the growth of the workforce means that the gains of the previous business cycle have been completely blown away.

“This is the only recession since the Great Depression to wipe out all jobs growth from the previous business cycle, a devastating benchmark for the workers of this country and a testament to both the enormity of the current crisis and to the extreme weakness of jobs growth from 2000-2007,” said Shierholz in a statement.

The ranks of the long-term unemployed — people out of work for 27 weeks or more — grew by 433,000 in June to a total of 4.4 million. Three in 10 of the unemployed are now long-term unemployed. The collapse of the housing industry contributes to their plight.

“We know right now because of the housing crisis that people can’t move to find another job,” Shierholz said. “People that in previous recessions may have been able to relocate to find another job can’t now.”

The Huffington Post has been profiling people who’ve been out of work for long periods of time. Marvin Bohn of Ohio hasn’t worked for a year and has been paying for his meds out-of-pocket. Steve Dittmann of Kansas said of the unemployed life, “I feel like I’m on the other side of a Plexiglass wall looking in.”

A broader measure of labor underutilization that accounts for people who’ve stopped looking for work hit 16.5% in June, a 0.1 percentage point increase.

“In June, there were large decreases in manufacturing, construction, and professional and business services,” said Bureau of Labor Statistics Commissioner Keith Hall in a statement. “Together, these three sectors have accounted for nearly three-quarters of the jobs lost since the recession began.

Many economists have predicted that even when the recession is technically over with the economy beginning to expand, there will be a “jobless recovery” as unemployment hovers in the double-digits.

Written by Arthur Delaney HuffingtonPost

On Friday, the Labor Department announced terrible, terrible news: more than a quarter million people lost their jobs in May. But in a sign of how bad things are, commentators from all quarters are heralding the news as good.

The U.S. unemployment rate hit 9.4 percent in May as employers shed 345,000 jobs — the highest since the recession of 1983, the Labor Department announced. The “silver living” is that the losses announced today are about half the monthly average for the past six months.

Friday’s unemployment numbers came as a surprise. Private payroll firm ADP estimated that U.S. companies lost 532,000 jobs in its National Employment Report on Wednesday. Economists had made similar predictions.

“Job losses continued to be widespread in May, but the rate of decline moderated in construction and several service-providing industries,” said Keith Hall, commissioner of the Bureau of Labor Statistics, in a statement.

“The loss of 345,000 jobs in May — 0.3% of employment — makes this jobs report the second worst in a quarter century not including the current recession, but in today’s economy a loss of only 345,000 jobs is welcome news,” said Heidi Shierholz, an economist with the Economic Policy Institute.

Of course, in a Wednesday conference call to help reporters throw cold water on overly cheery reactions to bad numbers, Shierholz stressed that regular folks wouldn’t be seeing any economic benefit for a long time.

“After the 1990 recession unemployment rose for another 15 months, and after the 2001 recession, unemployment rose for another 19 months,” Shierholz said. “If last two recessions any indication, unemployment will rise for at least another year.”

A lot of people are unemployed now.

“The number of unemployed rose by 787,000 to 14.5 million,” said Commissioner Hall. “Since the recession began, the jobless rate has increased by 4.5 percentage points, and the number of unemployed persons has grown by 7.0 million.”

The number of long-term unemployed is also discouraging: “Among the unemployed, the number who have been out of work 27 weeks or more increased by 268,000 in May to 3.9 million. These long-term unemployed represented 2.5 percent of the laborforce, the highest proportion since 1983.”

2009-06-05-jobs.png

ANGELA CHARLTON | May 28, 2009 05:01 PM EST | AP

PARIS — The top U.S. environment official says it’s time for the United States to shed its energy-wasting image and lead the world race for cleaner power sources instead.

After several years with a relatively low profile under President George W. Bush, the U.S. Environmental Protection Agency “is back on the job,” EPA Administrator Lisa Jackson told The Associated Press on Thursday during a trip to Paris.

What the EPA does domestically this year will be watched closely overseas. Nations worldwide are working toward a major meeting in Copenhagen in December aimed at producing a new global climate pact. The U.S. position on curbing its own pollution and helping poor countries adapt to global warming is seen as key to any new pact.

Jackson was in Paris for international talks on how rich governments can include global climate concerns in overall development aid.

She dismissed worries that economic downturn was cutting into aid commitments or investment in new energy resources. She said the United States should take the lead on clean energy technology, recession or no.

“We have to get in the race now _ and win it,” she said. “I don’t expect a moving backwards because of recession.”

At climate talks in Paris earlier this week, European environment ministers welcomed greater U.S. commitment to environmental issues under the Obama administration _ but said it still wasn’t aiming high enough in its targets for cutting U.S. emissions.

Jackson said a shift in the American mindset is only beginning.

Talking about energy efficiency and saying companies should pay to pollute _ “that’s a revolutionary message for our country,” she said.

For a long time, she said, “People didn’t even expect the EPA to show up” at events, much less set policies that could be seen as examples for the rest of the world.

“Now it seems like every day we’re rolling back or reconsidering a Bush era policy on clean air,” she said.

She said it was time for the United States to take a more active role in limiting chemical pollutants, after falling behind Europe in that domain.

The U.S. also has lessons to learn from countries such as the Netherlands, she said, after visiting its low-lying, flood-prone lands to study ways cities like her native New Orleans can better manage water.

Our Perspective:

It is good to hear the administration making positive comments about our energy’s future. Alternative energy is a growth business and the correct path for insuring our future energy indepenence.

Let us know your thoughts? You may leave a comment or email george@hbsadvantage.com

Would you like to know more about the financial opportunities that drive this investment. Feel free to contct us.

Thu May 21, 2009 10:24am EDT

Reporting by Jeremy Pelofsky; Editing by James Dalgleish

WASHINGTON (Reuters) – The U.S. economy will likely start growing again in the second half of this year but unemployment will likely keep rising through 2010 to peak over 10 percent, the Congressional Budget Office said on Thursday.

“The growth in output later this year and next year is likely to be sufficiently weak that the unemployment rate will probably continue to rise into the second half of next year and peak above 10 percent,” CBO Director Douglas Elmendorf said in prepared testimony to the U.S. House Budget Committee.

It will likely take several years for the unemployment rate to fall back to levels seen before the recession hit, in the neighborhood of 5 percent, he said in the prepared remarks.

 

Let us know your thooughts. You may leave a comment or email george@hbsadvantage.com

Written by Jeannine Aversa   AP

WASHINGTON — The pace of layoffs slowed in April when employers cut 539,000 jobs, the fewest in six months. But the unemployment rate climbed to 8.9 percent, the highest since late 1983, as many businesses remain wary of hiring given all the economic uncertainties.

The Labor Department tally released Friday wasn’t nearly as deep as the 620,000 job cuts that economists were expecting, and was helped by a burst of federal government hiring of temporary workers to prepare for the 2010 Census. The rise in the unemployment rate from 8.5 percent in March matched economists’ forecasts.

The new report underscored the toll the longest recession since World War II has taken on America’s workers and companies. However, the slowdown in layoffs may bolster expectations that the worst of the downturn’s hefty job losses are past.

“There are glimmers of hope. We are moving in the right direction in terms of layoffs. They are measurably less bad than what we’ve been through,” said Mark Zandi, chief economist at Moody’s Economy.com.

On Wall Street, the employment news gave stocks a lift. The Dow Jones industrials gained about 100 points in morning trading.

Still, companies will remain cautious in hiring, making it harder for laid-off workers to find new jobs.

If laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the unemployment rate would have been 15.8 percent in April, the highest on records dating back to 1994. The total number of unemployed now stands at 13.7 million, up from 13.2 million in March.

Companies also kept a tight rein on workers hours. The average work week in April stayed at 33.2 hours, matching the record low set in March.

Since the recession began in December 2007, the economy has lost a net total of 5.7 million jobs.

As the recession eats into sales and profits, companies have turned to layoffs and other cost-cutting measures to survive the storm. Those including holding down workers’ hours, and freezing or cutting pay.

Job losses in February and March turned out to be deeper, according to revised figures. Employers cut 681,000 positions in February, 30,000 more than previously reported. They cut 699,000 jobs in March, more than the 663,000 first reported.

The deepest job cuts of the recession _ 741,000 came in January. That was the most since the fall of 1949.

Employers last month cut the fewest jobs since 380,000 in October. Nonetheless, the April job losses were widespread.

Construction companies axed 110,000 jobs, down from 135,000 in March. Factories got rid of 149,000 jobs, down form 167,000 the month before. Retailers cut payrolls by nearly 47,000, less than the nearly 64,000 cut in March. And job losses in financial activities dropped by 40,000, down from 43,000 in the previous month.

The slower pace of job losses _ along with 66,000 more federal jobs _ helped to temper the overall payroll reductions in April. The pickup in federal employment was mainly due to the hiring of 63,000 temporary Census workers.

Looking ahead, economists expect monthly job losses for most _ if not all _ of this year. However, they hope the reductions won’t be as deep.

Labor Secretary Hilda Solis, wouldn’t speculate on the future pace of layoffs, but warned that some of the jobs lost “may not come back.” She urged jobseekers to get the training and education needed to be contenders for work in growing industries, such as health care, which added nearly 17,000 jobs in April.

Fallout from housing, credit and financial crises _ the worst since the 1930s _ has hurt America’s workers and companies, and the pain will continue. The jobs market traditionally doesn’t rebound until well after an economic recovery starts.

Federal Reserve Chairman Ben Bernanke earlier this week gave his most optimistic prediction yet about the end of the recession, saying he expects the economy to start growing again this year _ although the comeback could be weak and more jobs will disappear even after a recovery takes hold.

Companies will have little appetite to ramp up hiring until they feel the economy is truly out of the woods and a recovery is firmly rooted.

Against that backdrop, many economists predict the unemployment rate will hit 10 percent by the end of this year. Bernanke stopped short of that figure, saying it will be somewhere in the 9 percent range. Regardless, both private economists and Bernanke agree the unemployment rate will keep climbing into next year.

The Fed says unemployment will remain elevated into 2011. Economists say the job market may not get back to normal _ meaning a 5 percent unemployment rate _ until 2013.

And the job cuts have continued this week. Steelmaker Severstal International said it’s idling plants in Wheeling, W.Va., and Warren, Ohio, resulting in 3,100 layoffs due to the continuing deterioration of the steel industry. Microsoft Corp. said it was starting thousands of the 5,000 job cuts it announced in earlier this year and left the door open to even more layoffs.

The Commerce Department on Friday said wholesale inventories dropped 1.6 percent in March, much larger than the 1 percent fall that analysts had expected. That followed a 1.7 percent drop in February, the largest monthly decline on records that go back 17 years.

It was the seventh straight month that wholesale inventories fell as businesses struggled to get stockpiles in line with plunging sales. Wholesalers saw sales drop 2.4 percent in March, the fifth decline in six months.

Still, glimmers of hope have emerged that the recession may be losing its grip on the country.

The Labor Department on Thursday said the number of newly laid-off workers filing applications for jobless benefits plunged to the lowest level in 14 weeks, a possible sign that the wave of layoffs has peaked. Still, the number of unemployed workers drawing benefits climbed to a new record _ 6.35 million.

Other reports showed sales at many retailers fared better in April, with Wal-Mart Stores Inc. leading the way.

However, Friday’s employment report showed that workers’ wages barely budged in April, meaning consumers will probably stay somewhat cautious in the months ahead. Average hourly earnings nudged up to $18.51 in April, a 0.1 percent rise from the previous month.

In the U.S., the economy shrank at faster than a 6 percent annual rate late last year and early this year, the worst six-month performance since the late 1950s. Analysts think it is still shrinking now _ but probably at about half that pace. Many predict the economy could start growing in the third or fourth quarter as tax cuts and government spending on big public works projects included in President Barack Obama’s $787 billion stimulus package take hold.

US Economy shrinks at 6.2%

February 28, 2009

By JEANNINE AVERSA • Associated Press • February 28, 2009

Excerpts as reported in Courier Post

The economy contracted at a staggering 6.2 percent pace at the end of 2008, the worst showing in a quarter-century, as consumers and businesses ratcheted back spending, plunging the country deeper into recession.

The Commerce Department report released Friday showed the economy sinking much faster than the 3.8 percent annualized drop for the October-December quarter first estimated last month. It also was considerably weaker than the 5.4 percent annualized decline economists expected.

A much sharper cutback in consumer spending — which accounts for about 70 percent of economic activity — along with a bigger drop in U.S. exports sales, and reductions in business spending and inventories all contributed to the largest revision on records dating to 1976.

Looking ahead, economists predict consumers and businesses will keep cutting back spending, making the first six months of this year especially rocky.

“Right now we’re in the period of maximum recession stress, where the big cuts are being made,” said economist Ken Mayland, president of ClearView Economics.

The new report offered grim proof that the economy’s economic tailspin accelerated in the fourth quarter under a slew of negative forces feeding on each other. The economy started off 2008 on feeble footing, picked up a bit of speed in the spring and then contracted at an annualized rate of 0.5 percent in the third quarter.

The faster downhill slide in the final quarter of last year came as the financial crisis — the worst since the 1930s — intensified.

Consumers at the end of the year slashed spending by the most in 28 years. They chopped spending on cars, furniture, appliances, clothes and other things. Businesses retrenched sharply, too, dropping the ax on equipment and software, home building and commercial construction.

Before Friday’s report was released, many economists were projecting an annualized drop of 5 percent in the current January-March quarter. However, given the fourth quarter’s showing and the dismal state of the jobs market, Mayland believes a decline of closer to 6 percent in the current quarter is possible.

The nation’s unemployment rate is now at 7.6 percent, the highest in more than 16 years. The Federal Reserve expects the jobless rate to rise to close to 9 percent this year, and probably remain above normal levels of around 5 percent into 2011.

A smaller decline in the economy is expected for the second quarter of this year. But the new GDP figure — like the old one — marked the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through an intense recession.

“It’s going to be a challenging 2009,” Scott Davis, chief executive officer of global shipping giant UPS, said Thursday while speaking to the U.S. Chamber of Commerce in Washington.

American consumers — spooked by vanishing jobs, sinking home values and shrinking investment portfolios have cut back. In turn, companies are slashing production and payrolls. Rising foreclosures are aggravating the already stricken housing market, hard-to-get credit has stymied business investment and is crimping the ability of some consumers to make big-ticket purchases.

It’s creating a self-perpetuating vicious cycle that Washington policymakers are finding hard to break.

To jolt life back into the economy, President Barack Obama recently signed a $787 billion recovery package of increased government spending and tax cuts. The president also unveiled a $75 billion plan to stem home foreclosures and Treasury Secretary Timothy Geithner said as much as $2 trillion could be plowed into the financial system to jump-start lending.

For all of 2008, the economy grew by just 1.1 percent, weaker than the government initially estimated. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001.

With Friday’s figures, Mayland lowered his forecast for this year to show a deeper contraction of just over 2 percent.

In the fourth quarter, consumers cut spending at a 4.3 percent pace. That was deeper than the initial 3.5 percent annualized drop and marked the biggest decline since the second quarter of 1980.

Businesses slashed spending on equipment and software at an annualized pace of 28.8 percent in the final quarter of last year. That also was deeper than first reported and was the worst showing since the first quarter of 1958.

Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects by 21.1 percent, the most since the first quarter of 1975. Home builders slashed spending at a 22.2 percent pace, the most since the start of 2008.

A sharper drop in U.S. exports also factored into the weaker fourth-quarter performance. Economic troubles overseas are sapping demand for domestic goods and services.

Businesses also cut investments in inventories — as they scrambled to reduce stocks in the face of dwindling customer demand — another factor contributing to the weaker fourth-quarter reading. The government last month thought businesses had boosted inventories, which added to gross domestic product, or GDP.

GDP is the value of all goods and services produced in the United States and is the best barometer of the country’s economic health.

Fed Chairman Ben Bernanke earlier this week told Congress that the economy is suffering a “severe contraction” and is likely to keep shrinking in the first six months of this year. But he planted a seed of hope that the recession might end his year if the government managed to prop up the shaky banking system.

Even in the best-case scenario that the recession ends this year and an economic recovery happens next year, unemployment is likely to keep rising.

That’s partly because many analysts don’t think the early stages of any recovery will be vigorous, and because companies won’t be inclined to ramp up hiring until they feel confident that any economic rebound will have staying power.

More job losses were announced this week. JPMorgan Chase & Co. on Thursday said it would eliminate about 12,000 jobs as it absorbs the operations of failed savings and loan Washington Mutual Inc. That figure includes 9,200 cuts announced previously and 2,800 jobs expected to be lost through attrition.

The NFL said Wednesday that the league dropped 169 jobs through buyouts, layoffs and other reductions. Textile maker Milliken & Co. said it would cut 650 jobs at facilities worldwide, while jeweler Zale Corp. said it will close 115 stores and eliminate 245 positions.

Our Perspective:

The news keeps getting gloomier! I guess there is no easy way t0 say it. We took our eye off the ball. We elected officals to represent our interest and take care of our welfare. We can try to point fingers but we are all responsible. We all drank the kool-aid.

We thought this could never happen to us. We’re educated, life is good. We became complacient and did not plan for our future. I know President Obama is throwing a lot against the wall, hoping something will stick.

Roosevelt introduced the NewDeal. If something didn’t work, he said let’s tweak it, what else can we do. Obama is following this lead. It may not be pretty, but we are not left with many alternatives. We can see what happens when we do nothing or we are caught up in our own self interest.

We are all one and we are here to help one another. We must approach this dilemna with the hopes of picking everyone up, not just a few.  There will be difficult decisions. We are resilient and we will rebuild and prevail You may leave a comment or email george@hbsadvantage.com .

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