Our long-running worry that the economy's suffering would get worse before it gets better finds ample support in this morning's employment report for November. Nonfarm payrolls plunged by 533,000 last month, the U.S. Labor Department reports. That's the steepest monthly decline since 1974 and the sixth-worse number on record going back to 1939.
The labor market, to be frank, is bleeding, and it's not obvious that blood will stop flowing soon. The negative momentum has a head of steam — no question about it. Whatever monetary quivers the Federal Reserve has left to play should be deployed post haste. That includes dropping the Target Fed Funds Rate to 50 basis points, perhaps even to 25 basis points, while ratcheting up efforts on so-called quantitative easing, which is to say the full array of unconventional monetary policies. With interest rates so close to zero, all that's left with monetary policy are the irregular methods of injecting money into the economy. It's not clear that such efforts will provide much additional stimulus, but at this point there's little reason not to try.
The main front in the war to battle deflation and recession now shifts in earnest to Congress and fiscal stimulus. Alas, there's a bit of a political issue tied to this idea at the moment. The economy can't wait for President-elect Obama to assume the presidency late next month. Allowing the economy to fend for itself over the next 7 weeks risks letting an already troubling situation fester into an even deeper problem. The Bush administration needs to reach out to the Obama camp and the two sides need to work as one with the lame-duck Congress.
It's debatable how much fiscal stimulus is needed, but whatever the number it should be big: $500 billion at a minimum, although double or even triple that amount isn't beyond the pale. We don't make that recommendation lightly. The details of how it is spent matter too. The brightest minds in economics, hopefully, will advise the politicians on how to spend a new round of fiscal stimulus to insure maximum stimulative results. In any case, the stakes are clear: If the government has any hope of keeping the economy from further deterioration, the window of opportunity is closing fast and so bold, effective action is required soon.
Of course, the argument for acting now may not look all that compelling if we limit our gaze to the unemployment rate, which rose to 6.7% in November from 6.5% previously. By historical standards, that doesn't look excessively alarming. But the depth of the jobs destruction in nonfarm payrolls last month speaks loud and clear about where the unemployment rate is headed: higher, perhaps much higher.
The leverage and excess built up over the years is unwinding, and it's now infecting virtually every corner of the economy. Indeed, other than in the government and education/health services areas, job losses were the norm across the economy last month. Notably, the usually robust services industry shed a huge 370,000 jobs last month alone, more than half of the total jobs lost in the nation. Services, which collectively employ the lion's share of the country's workforce, have only recently started losing jobs. That's not surprising, since services tend to hold up better than, say, manufacturing, which feel the pain first when the business cycle starts to falter. Nonetheless, the magnitude of losses in services highlights the depth of the recession that now has the economy by the throat.
"This is a clear employment blowout. Firms are reacting as dramatically as they can to make sure they have cost structures they can survive the recession we are in," Joel Naroff, president of Naroff Economic Advisors, tells Reuters today.
Turning around the negative sentiment won't be easy, but an all-out effort has rarely looked more convincing. The moment for action on the fiscal front has arrived. Yes, the thought of creating so much government debt raises a host of issues for the years ahead. But doing nothing courts even greater risks. We must wage war on the enemy as it arrives, and for the moment the monster at the door is recession with a capital "R". Dealing squarely with the beast is, for the moment, priority one, two and three.