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Thursday, December 04, 2008

I Wouldn't Have Thought There'd Be A Doubt

Over at Ann Althouse' blog I read a number of responses to her post on the NBER news, and I was troubled by how many people seemed to feel the economy wasn't in deep trouble. Profound skepticism and the belief that this is all media/political highjinks seem almost to be the consensus.

Well, here's reality in the form of last week's states reporting an increase of over 1,000 initial claims:
State Change
State Supplied Comment
RI +1,031
Layoffs in the service industry.
WA +1,082
Layoffs in the trade and manufacturing industries.
NV +1,082
No comment.
NJ +1,226
No comment.
AL +1,263
Layoffs in the transportation equipment, electrical equipment, wood products, and apparel industries.
WI +1,383
Layoffs in the construction, service, and manufacturing industries.
OK +1,506
No comment.
CT +1,521
Layoffs in the construction industry, and agriculture.
CO +1,548
No comment.
MA +1,886
Layoffs in the construction and service industries.
OR +2,123
Layoffs in the trade, service, public administration, and manufacturing industries.
IL +2,309
Layoffs in the construction, service, and manufacturing industries.
GA +2,322
Layoffs in the transportation equipment, textile, and carpets/rugs industries.
TN +3,090
Layoffs in the industrial machinery, transportation equipment, rubber/plastics, wood products, and fabricated metals industries.
NY +3,317
Layoffs in the construction, transportation, and manufacturing industries.
VA +3,367
No comment.
FL +3,569
Layoffs in the construction, trade, service, and manufacturing industries, and agriculture.
AZ +3,594
No comment.
PA +4,584
Layoffs in the construction, trade, and service industries.
TX +4,702
Layoffs in the service and manufacturing industries.
KY +4,992
Layoffs in the automobile and manufacturing industries.
MO +5,820
Layoffs in the construction and manufacturing industries.
IN +6,501
Layoffs in the automobile and manufacturing industries.
MI +6,611
Layoffs in the construction and manufacturing industries.
OH +6,658
Layoffs in the automobile and manufacturing industries.
CA +10,882
Layoffs in the service and manufacturing industries.

As for the other side of the story - states reporting decreases of more than 1,000 - there weren't any.

That having been said, there were drops in the raw numbers of initial claims and continuing claims this week compared to last week. Initial claims (very volatile) dropped 78,974, and continuing claims dropped 132,069.

Employment is a lagging economic indicator. Unemployment reacts to the change in the economy rather than initially causing the downturn, and even after the economy has troughed and resumes its growth, unemployment usually continues to rise for a while.

We are far from the turn in US unemployment, because we will see FUT receipts start to rise at the turn. Right now they are still far too low.

There is no economic statistic that says we aren't in recession. Every single one of them agrees that we are.

Worse yet, this is a global recession, with Asia, Europe, and the Americas all sliding into a synthesized and self-reinforcing downturn. This hasn't happened in a very long time indeed. Normally there is correlation, but lag, so that for example if Europe goes at least NA is on the upswing, etc. The IMF defines a global recession as world growth dropping to 3% or below. At that level of activity, some countries will be expanding even while others are contracting.

However, this cycle is different because there was a global credit boom which involved substantial growth in cross-currency lending, and in some cases the chains of borrowing were quite long. There was also an unprecedented and recent shift into monetary bets (credit default swaps, etc) as a means of risk mitigation, all of which are doomed to fail in a substantial downturn.

When you get this type of sudden growth in chained lending, it means that the world's monetary supply is growing rapidly, thus inflation, thus a downturn inflicts much more severe damage as the chains of lending contract and implode, losses occur, and the world's effective money supply contracts. Right now, global PMI seems to show a global contraction of about 2% annualized. Clearly that is a very different animal than 3% growth, if continued for more than a few months. However all is not lost; this occurred from the fuel shock, which placed additional stress on credit. The fuel shock is correcting itself, and if the world doesn't slide into protectionism, we can look for an amelioration in trend within a couple of months.

There is another shock baked in, as the European lending chains snap and the true impact of that takes hold. It will require some major effort and coordinated policy to prevent that shock from inflicting more harm.

Further, the ME has in recent years jumped in consumption, and the situation there is rapidly taking a turn for the worse. Take a look at this Bloomberg article chronicling the Dubai bust.

There now appears to be window of opportunity to at least slow the downturn (inflation falling out, thus consumption supported by the beginning of an increase in real incomes), and that is why all the central banks are adopting rate cuts and other stimulus measures. But we don't have a good feel for how this is going to work yet. China's measures will help China, but may push Australia and other commodity producers further down.

This is the most serious economic dislocation since the 1950s.

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