All talks about US economic recovery has been thrown to the wind with the latest release of the unemployment numbers today. The unemployment rate jumped by as much as 40 basis points in one month, up from 9.8% to 10.2%, while the general expectation was a level 9.9%.

Nonfarm payrolls declined by 190,000, more than the expected figure of 175,000. While this jump would have some technical component to it, the current unemployment  rate is still a reality. More interestingly, the largest job losses have been in the construction, manufacturing and retail trade. The dip in construction is not surprising as there is a large scale fear that after the scheme of first time home buyer credit of USD 8,000 expires (slated for end of this month), demand will plummet. 

Going through the numbers, there are quite a few interesting observations to be made:
·         Unemployment among full time workers (i.e those desirous of working full time or are on lay off from full time job) has crossed 11% mark to reach 11.1%

·         156,000 additional people remained unemployed for more than 26 weeks, thereby making them ineligible for unemployment insurance

·         In last one year, an additional 3.2 million people have stopped receiving unemployment allowance

·         Of the total unemployed, currently 35.6% of them are not getting any allowance

·         The average duration of unemployment has gone upto 26.9%, the highest ever recorded

What this means is that recovery (or some acceptable form of it) will only be possible if the stimulus package continues. Withdrawal of stimulus will affect likely nascent recovery.

Not surprisingly, yesterday the Senate passed the proposed extension of unemployment insurance benefit. Once this is okayed by the House and the president, the Emergency Unemployment Compensation Extension Act (HR 3548) will provide immediate assistance by extending relief to those workers whose benefits would or has already run out. The legislation will provide families in all states with 14 weeks of additional benefits, and six more weeks to the 27 states with the highest unemployment rate. Workers in these high unemployment states who have exhausted or will soon exhaust their benefits will be eligible for a total of 20 additional weeks of emergency unemployment compensation.

Now, the funny part. The bill would cost $2.4 billion, and will be paid for with an extension of the federal unemployment tax (FUTA). In essence, the government will force the companies to pay more tax for hiring employees, which would then be used to pay the allowance. 

My fear is that, this will actually make the companies even more reluctant to hire full time workers. When the business is not sure about sustainability of demand, they would not prefer to hire full time workers as it will be even more costly (given the imposition of additional tax). They would prefer to increase productivity of the existing workers (as was evident from the rise in productivity numbers released yesterday), hire part time workers (as is evident from a dip in unemployment rate among part time workers, from 6.4% to 6.1%) and increase the work hours of part time workers. 

Another point to be noted is that, the Senate yesterday also approved extension of the USD 8,000 first-time homebuyer tax credit through April 30, 2010 and provide for a USD 6,500 credit to new purchasers who have lived in their current residence for five years or more. This will, ofcourse, moderate the fall (may even see some increase) for some more months going forward. But this is more about postponing the inevitability and preponing the future demand (which will have even adverse impact on recovery). 

Issue is, the basic problem stays. Consumers would need to contract and deleverage. Continuing the allowance for some more months will not lead to any sudden loosening of their purse strings, wiser as they are with recent experience of jobs hard to come by while bills (to be paid) being the reality. Companies would have been better off if they would have been incentivized by the government to hire people, which would have brought back some stability and confidence. 

One event look increasingly (read ominously) possible. The double dip recession, the moment the government realizes that the fiscal burden is becoming too high and starts to exit. Brace for an even more difficult 2010.
 


Comments

Rajib Ghosh
11/08/2009 05:14

Good article. Your thoughts are perfectly aligned with mine and I was expecting this to happen for the last 4 months or so. In a country where 66% of the GDP is aided by consumer demand, a country where consumers are so much over levered, economy plummets when the consumers delever or forced to delever leading to decline of the first. As the credit dried up in US, consumers retracted which caused demand to fall which caused jobs to be lost which caused further demand fall and the downward spiral began. Government tried their part - reduced interest rate, pumped money into banks to free up credit but that did not happen really. Other stimulus measures front loaded the system - like car sales in Q2, home sales in Q2, Q3 etc. - government rational was, let's artificially crank up some sectors, the biggest contributors to the economy, and when the engine starts running again, it will be self sustainable because US economy is resilient. That was over estimation of US economy and a 'W' style recession is now seems inevitable. What can save us? Increased export which is happening as dollar weakens - and as you said government stimulus to encourage corporations to hire - in the form of tax benefits. Otherwise, the W can become an oscillatory curve.

Reply
Kunal Kumar Kundu
11/08/2009 23:02

The fact that US has been set up nice for this kind of a situation is quite clear when you look at their over-leveraged consumers, who drive their economy. The problem with the recent recession is the huge amount of wealth destruction that has taken place. And, what is important to note this time is that the event coincided with the beginning of retirement of the baby boomer generation. When the potential retirees, who blindly depended on their wealth for their retirement fund, while taking consumerism to ridiculous heights (by becoming leveraged beyond logic, again backed by wealth illusion) faces reality of such disaster, their psyche would be impacted. With lesson being learnt, my hunch is that the remaining baby boomers (those on the throes of retirement or otherwise) will become much more cautious going forward. Which means a greater part of the economy can lose momentum.

But we also know that our memories tend to be short lived and if these lessons are lost, then one can expect such traumatic situation to revisit.

Reply
Mark Stevens
11/12/2009 16:40

Federal govt is going to make sure unemp benefits are extended. The cost is relatively small, about $8 Billion a month (5 million people x $1600 per head). Stop attempting to falsely scare people and stir up a nonexistent problem. Unemp benefits may not solve our economic crisis, but it certainly prevents social unrest/crime/riots/chaos.

Reply
Kunal
11/13/2009 01:58

Mark,

Thanks for your mail. The point is, there is possibly a better way of solving the problem rather than extending the benefit. Other than leading to a moral hazard situation, the basic problem cannot be solved. It might make sense to incentivize the corporates to hire people rather than make them pay more tax which will be transferred to people not getting jobs.

Transferring income will never solve the problem. Building up capability would.

But thanks for your comment.

Warm regards,

Reply

Hello I am Fiona and I am a HR undergraduate reporting about the impact of the economic downturn in employment opportunities. I hope I can utilize much of the information and facts here for my document.

Thanks Kunal

Reply
Kunal
09/09/2010 00:38

Dear Fiona,

This is fine. You may use it provided you give credit to the source and the author. Also, I would like to have a copy of the final report.

All the best.

Warm regards,

Kunal

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