524,000 Jobs Lost in December; The Economy Is in a Depression

On Friday, the Labor Department reported the economy lost 524,000 payroll jobs in December, and average employment was 1.3 million lower in the fourth quarter than in the third quarter. The economy is the jaws of a depression.

The economy has shed 2.6 million jobs since December 2007, as the full weight of the banking crisis, trade deficit with China and burdens imposed by high-priced imported oil are bearing down on manufacturing, construction and the broader economy with unrelenting pressure.

Unemployment increased to 7.2 percent in December; however, factoring in discouraged workers, unemployment is closer to 9.4 percent. Add workers in part time positions that cannot find full time employment and the hidden unemployment rate is 14.5 percent.

Recession or Depression?

The economy contracted at about five percent annual rate in the fourth quarter. The real question is whether the economy is in a recession or depression?

Recessions are like stock market corrections—after a time, equity prices rebound without government intervention. Federal Reserve interest rate cuts and stimulus tax rebates and spending have shortened the lives and eased the impact of post-World War II recessions, but those policies did not end them. The economy self corrected.

A depression is not self-correcting. Roosevelt Administration stimulus packages—huge deficit spending—eased the pain but failed to end the Great Depression. Roosevelt’s policies did not put the U.S. economy on a sustainable growth path, because New Deal policies worsened structural problems that pulled the economy down in the first place. For example, the New Deal proliferated monopoly pricing, extended the life of undersized farms, raised structural savings rates, and created a system of home lending too dependent on federally sponsored banks.

The challenges facing President-elect Barack Obama could not be clearer. The current economic slowdown has two structural causes—bad management practices at the large money center banks and the huge foreign trade deficit. These problems are not self-correcting.

The economy will not recover without fundamental changes in banking and trade policy. A large stimulus package, though necessary, will only give the economy a temporary lift but then unemployment will rise again and continue at unacceptable levels indefinitely without successively larger stimulus packages and huge federal budget deficits. The economy is a depression, not a recession

To accomplish lasting prosperity, President-elect Obama will have to fix the banks and the trade deficit. Obama must ensure that the banks use the trillions of dollars in federal bailout assistance to renegotiate mortgages and make new loans to worthy homebuyers and businesses. Obama must make certain that banks do not continue to squander federal largess by padding executive bonuses, acquiring other banks and pursuing new high-return, high-risk lines of businesses in merger activity, carbon trading and complex derivatives.

Industry leaders like Citigroup (C) have announced plans to move in those directions. Many of these bankers enjoyed influence in and contributed generously to the Obama campaign. Now it remains to be seen if a President Obama can stand up to these same bankers and persuade or compel them to act responsibly.

In addition, Obama must address the huge cost of imported oil and trade deficit with China or any effort to resurrect the economy is doomed to create massive foreign borrowing, another round of excessive consumer borrowing, and a second banking crisis that the Treasury and Federal Reserve will not be able to reverse.

Ultimately, reducing the oil import bill will require higher mileage standards for automobiles and assistance to automakers to accelerate the build out of alternative, high mileage vehicles. Fixing trade with China will require a tax on dollar-yuan transactions if China continues to refuse to stop subsidizing dollar purchases of yuan to prop up its exports and shift Chinese unemployment to the U.S. manufacturing sector.

Near term, a stimulus package focused on infrastructure is critical for resuscitating growth. The recent round of tax rebate checks ended up in savings accounts or spent at the Wal-Mart (WMT) on Chinese goods, and did little to create jobs or accelerate growth. Whereas projects to repair roads, rehabilitate schools and refurbish public buildings would create high-paying jobs at home and provide a legacy in capital improvements that assist growth now and in the future.

However, stimulus spending, alone, won’t fix what’s broke. It didn’t end the Great Depression. Japan has had a succession of stimulus spending over the last two decades and that has failed to restore its economic dynamism. Similarly, President-elect Obama’s massive stimulus package, alone, won’t fix the U.S. economy. He must also reach into the management of the banks, and dramatically reduce U.S. dependence on imported oil and the trade deficit with China. The alternative is economic stagnation or worse, a long and deepening depression.

Without fixing the banks, energy and trade with China, the stimulus package will give the economy a temporary lift, but then unemployment will rise again. The economy would then require progressively larger stimulus packages, and foreign borrowing to finance them, to keep Americans employed. Eventually, the foreign line of credit would run out, and widespread unemployment, depression and economic decline would follow.

Wages and Unemployment

In December, wages rose a modest 5 cents per hour, or 0.3 percent. Wage pressures pose little threat to accelerate inflation.

The unemployment rate was 7.2 percent in December, up from 6.8 percent in November. However, these numbers belie more fundamental weakness in the job market. Discouraged by a sluggish job market, many more adults are sitting on the sidelines, neither working nor looking for work, than when George Bush took the helm. Factoring in discouraged workers, who have left the workforce, and those forced into part time employment owing to the lack of full time work, the unemployment rate is about 14.5 percent.

During the presidential campaign, declining real wages and fewer adults working gave Barack Obama’s proposals to redistribute income through the tax system a lot of traction. However, those policies will do little to correct the fundamental systemic problems that are destroying good jobs and squeezing middle class families, even if they would make them feel better for a little while.

Going forward, solutions that create better jobs will require cutting the trade deficit by at least half to substantially boost domestic manufacturing, solving the problems of the large money center banks to get mortgage money flowing and housing construction going again, and energy policies that more aggressively develop alternative fuel sources, conserve oil, and open up new domestic fields for conventional oil and gas production. Reducing dependence on foreign oil requires doing all things environmentalists want us to do and all things environmentalists don’t want us to do.

Politically correct promises to create millions of new jobs producing alternative fuels makes effective presidential campaign slogans, but realistic policies for governing require aggressive development of more conventional oil and gas, as well as nonconventional energy sources, and efforts to improve the energy efficiency of personal transportation.

If the Democrats are not willing to drill for more oil off shore and take on the automobile industry’s resistance to significantly higher mileage vehicles, the U.S. economy will be even more indentured to Persian Gulf oil exporters at the end of President-elect Obama’s first term than it is today.

Finally, diplomacy has failed to redress the currency issue with China. If President Obama is not willing to take tough steps to redress the trade imbalance with China and reduce oil imports, together the Persian Gulf oil exporters and China’s sovereign wealth funds may be able to buy the New York stock exchange eight years from now. Americans, outside those working for the New York banks that facilitate this sellout, will find their best futures waiting on tables for Middle East and Chinese tourists.

Manufacturing, Construction and the Quality of Jobs

Going forward, the economy will add some jobs for college graduates with technical specialties in business, health care, education, and engineering. However, for high school graduates without specialized technical skills or training and for college graduates with only liberal arts diplomas, jobs offering good pay and benefits remain tough to find. For those workers, who compose about half the working population, the quality of jobs continues to spiral downward.

Historically, manufacturing and construction offered workers with only a high school education the best pay, benefits and opportunities for skill attainment and advancement. Troubles in these industries push ordinary workers into retailing, hospitality and other industries where pay often lags.

Construction employment fell by 101,000 in December. This is a terrible indicator for future GDP growth. Retailing shed 67,000 thousand jobs, and financial services lost 10,000 jobs.

Manufacturing lost 149,000 jobs, and over the last 105 months, manufacturing has shed more than 4.3 million jobs. The trade deficit with China and other Asia exporters are the major culprits.

The dollar is too strong against the Chinese yuan, Japanese yen and other Asian currencies. The Chinese government intervenes in foreign exchange markets to suppress the value of the yuan to gain competitive advantages for Chinese exports, and the yuan sets the pattern for other Asian currencies. Similarly, Beijing subsidizes fuel prices and increasingly requires U.S. manufacturers to make products in China to sell there.

Ending Chinese currency market manipulation and other mercantilist practices are critical to reducing the non-oil U.S. trade deficit, and instigating a recovery in U.S. employment in manufacturing and technology-intensive services that compete in trade. Neither President Bush nor Congressional leaders like Charles Rangel and Chuck Schumer have been willing to seriously challenge China on this issue, and Senators McCain and Obama appeared comfortable with continuing their approaches during the campaign.

Now President-elect Barack Obama must alter his position, and get behind a policy to reverse the trade imbalance with China, or preside over the wholesale destruction of many more U.S. manufacturing jobs. These losses have little to do with free trade based on comparative advantage. Instead, they deprive Americans of jobs in industries where they are truly internationally competitive.

In the end, without assertive steps to fix trade with China, as well as fix the banks and curtail oil imports, the Bush years will seem like a walk through the park compared to the real income losses Americans will suffer during the Obama years.

Instead, were the trade deficit cut in half and the banks fixed, manufacturing would recoup at least 2 million jobs, U.S. growth would exceed 3.5 percent a year. Real wages and domestic savings would climb, and the federal government would receive more revenues to balance its budget or address other pressing domestic needs.

The choices for the new president are simple. It’s either recovery or depression. Fix the banks, trade with China and energy policy or become America’s Nero.

Comments

[Steven Hansen:]

The economic model is broken. it relies on credit growth expansion. the economy literally ran out of steam. i can think of no way to repair the model because credit is maxxed.

the stimulus being proposed is not stimulus but gdp filling. it does not resolve the underlining market problem - nor act like a true stimulus.

we are left with few options other than the pain of unwinding the debt. this is a long term process, and is compounded by the baby boomer retirement.

a depression is a long term recession which economists like to say has unemployment over 10%. to me, a depression is a seismic shift in a countries economy which corrects it to a lower level. either way, we are in a depression.

Jan 11 04:40 AM

[Dave Wrixon:]

Not much free market philosophy there, but the blame of course as usual lands on the Chinese.

The fundamental problem seems to me that America needs to grow up and stop behaving like a bunch of teenagers who have been given way too much allowance.

The trade deficit is not the cause of the decline of American Manufacture. It is a symptom. Most of the solution coming out at the moment address the symptoms not the causes.

Anyway, it matters little now. It is way too late to take preemptive action. Just cling to your life-raft for dear life and hope you can ride out the storm.

Jan 11 04:46 AM

[Enough Wealth:]

I hope that the US economy recovers fairly soon - a prolonged string of recessions and weak growth like Japan experienced in the past couple of decades would be disasterous for the US and debilitating for the global economy. If the US indeed enters a depression rather than a severe recession, it would be extremenly dangerous. I've seen some opinions that the Great Depression was only ended by the stimulus effect of WWII. I'd hate to have to rely on WWIII to get the US out of a depression!

On the other hand, I can't really feel too concerned if US real wages and living standards decline as a result of Chinese wages and living standards rising at the expense of the US. After all, there is a huge cap in living standards around the world, and although it would be nice if the rest of the world's population enjoyed rapid increases in living standards while the US continued to maintain or improve, it's more likely in a world of limited resources and global pollution problems for equality to be achieved by US (and other developed countries) standard of living declining while the developing and emerging economies enjoy somewhat improved standards.

Jan 11 06:52 AM

[investor88:]

Peter has hit the nail on the head by declaring a Depression [instead of debating endlessly whether we are in a recession or depression and looking round the corner at the next boom business as usual].

Nobody least of all politicians is going to take bitter medicine as Peter has outlined. We have to let nature take its course, take Depression in its stride even if it means a tough time ahead for all.

Notice that almost nobody agrees with Peter, everyone is talking about the next boom, about the magic wand of printing money and throwing money at problems.

Jan 11 08:09 AM

[tginomorebush:]

Peter is right .......... D E P R E S S I O N ..... king george iii bush-it legacy!

Jan 11 08:45 AM

[prudentinve...:]

Excellent article, with clear identification of the issues and the approprialte policy goals.

It is discouraging that the new administration is staffed with many of the same people who formulated the policies that led to the current crisis. It should have been better to introduce new perspectives, and Dr. Morici could have had much to contribute.

Jan 11 09:08 AM

[socrateazz:]

Very true. The consume now for you deserve it and pay later because we will find a way around it attitude of the last twenty years is coming back to haunt this country. Other countries policies generally made things easier on americans by allowing the country to consume more than it produced. Many folks warned of those problems through the 1990's and 2000's. But they were just crackpots right! Payback tIme is coming, And interest is going to be added. Will change be anything like what most people had envisioned when they voted this year? I expect not

Jan 11 09:46 AM

[axelrod608:]

I won't debate the recession/depression issue, but giving Obama the sole responsibilty of fixing things is more than a little unfair.

Fix the banks ? The megabanks we brought into the 21st century were dinosaurs, unsustainable. Lost in an arcane world of hyped derivatives based on mathmatical models using faulty assumptions, they cannot be fixed. They will continue to hemmorage for years as their hidden level 2 and 3 holdings go sour and rot.

The bloated "economy" of 2006 was like the prize athlete pumped up on steroids. The juice is gone and with it the body. And the performance.

So many articles like yours point out that the Depression was NOT fixed by government fiscal intervention. The Japanese two-decade recession was not helped by govt fiscal stimulus. Why is everyone so blind ? We seem to have a one-trick-pony economic theory of how to deal with recessions that evidence shows to be ineffective, yet we hold fast to the idea and do it all over again.

The 2006 bubble was a product of decades of cheap, easy unlimited credit. Period. All else was symptoms. The idea of trying to fix the credit bubble with more liquidity in the form of credit is about as bright as trying to cure a cold by giving the patient pneumonia.

Time to throw out the fiscal policies based on faulty assumptions. Or exacerbate the economic problems.

Jan 11 10:50 AM

[John Lounsbury:]

To all readers - - -

If you want a diametrically opposed opinion go to the following SA article:

Leading Indicators: They're Usually Late (seekingalpha.com/artic...)

I left my negative comments in that comment stream and will not repeat them here.

This article gives a much more reasoned assessment of the economic situation as of the moment, in my opinion. However, I urge you to read the referenced article to find out how people at the other extreme are thinking (rationalizing?)

Peter Morici - - -

Thanks for presenting some very well reasoned arguments.

Jan 11 02:44 PM

[Glen L.:]

" I've seen some opinions that the Great Depression was only ended by the stimulus effect of WWII. I'd hate to have to rely on WWIII to get the US out of a depression! "

Two thoughts:

1. World War II did NOT end the Depression. It did end the accompanying unemployment problem, as millions of idle workers were drafted, but war economies are ruinous, and the nation's debt soared. The Depression ended because the New Deal programs were largely scrapped, and American industry was able to retool its war production plants for domestic goods. It could not have done that with the New Deal still in place.

2. You are quite right, we certainly don't want World War III, in any case. My fear is that Obama or a successor will be tempted to use military power to extend the life of the empire by seizing foreign assets, e.g. oil fields.

Jan 11 04:23 PM

[Glen L.:]

Peter Morici's article is a hodgepodge of good and bad economic analysis, but the real problem is his belief (shared by 99% of the population) that government can do something to cure the problems. Government is at the root of the problems, and has made them worse by market interference via the central banking cartel. There is no policy prescription to extract us from the mire; the only good thing that government can do is to drastically cut spending and taxes, radically downsizing itself so the private economy has room to produce and expand. Of course, government never does that without either violent revolution or default.

I vote for the latter.

Jan 11 04:31 PM

[jepittman:]

I suppose I am one of those Mr. Loundsbury (whom I have immense respect for) says holds a 'diametrically opposed opinion'. I won't argue semantics with Mr. Morici but will offer a point of agreement with him. "Its either recovery or depression" is where we are in agreement. I fall on the 'recovery' side of the question. I will not deny longer term troubles. There are a host of them. Many of you have done a fine job of laying them out, and they are valid concerns. However we all have to live week to week, quarter to quarter. Some of these problems may take years to truly manifest themselves. In the meantime markets trade and opportunities present themselves. Windows open and close. Presently Mr. Market is IMO offering assets cheaper than he has in some time. If you believe as I do a recovery is in the cards, there is one type of opportunity. If you believe it is depression there is another. We all do the best we can. Good luck to all. We're all going to need it.

Jan 11 05:25 PM

[Jolly_Rancher:]

In past comments I've made several suggestions that would help bring us out of the depression: 1) open drilling in California, Florida and the Northeast; 2) Provide incentive and rational regulation of nuclear power; 3) increas CAFE standards to 25 minimum; 4) reduce income taxes while increasing energy usage taxes. These will take care of the energy trade deficit long term.

Now I'm adding a new suggestion: Every dollar of investment spent abroad by U.S. corporations does not reduce taxable corporate income. Every dollar invested within the United States reduces taxes by $1.25. This will help deal with the lack of domestic capital investment.

Jan 11 08:17 PM

[Teutonic Kn...:]

Peter, congratulations for an excellent article written; however, I'd like to add a few points as food for thought as below:

1) It took the Economic Bureau Research Institute (EBRI) a full year (in December 2008) to declare that the "Recession of 2008" had actually started in December of 2007. I wouldn't be surprised if the government would not confirm that we are in a Depression until sometime at least in 2010, some two years after it had started. The reason might be simple - to suppress panic.

2) It wasn't Charles Rangel and Chuck Schumer's fault of not being forceful enough to wrangle the Chinese to revalue the Yuan upward against the dollar.
Here again, we continue to underestimate the Chinese. They are not stupid. In this high-stake world trade poker game they know that they hold the upper hand. We had farmed out the manufacturing of low-cost low-tech goods to them because we need their "cheap labor". (Note: Cheap here does not mean any sense of low dignity). They know that right now we need them more than they need us.

Ironically, the truth of the matter is that America could readily fix the trade deficit and budget deficit problems rather handily. Ready for the answer? Lower our standard of living, lower our wages and our salaries, repatriate jobs that we outsourced overseas, and drastically reduce dependence on foreign oil by going aggressively green.

Unfortunately, I predict that none of these will happen until the pending Great Depression II (GD2) reaches its full force.

Jan 11 09:25 PM

[scotty1560:]

good article Peter and I agree...

axelrod has a good point about credit....if you look at 35+ years since credit
cards and more sophisticated credit...the result has been terrible for much of
this country...first we had credit card problems...now it's foreclosure....

trade is maybe the biggest issue and responsible use of credit another....
good or bad ending this will take years to play out...

Jan 11 11:20 PM

[Allen Phatimer:]

Bravo! Thanks for having the courage to address the trade issue. No one wants to touch that for fear of being called a commie but how free market capitalist is it to allow China to manipulate the terms of trade with their largest trading shill? And thanks as well for pounding away at the need for regulation of the shotgun welfare called TARP and TALF or whatever other acronym that might enable the kind of irresponsibility that makes us a second rate nation. The employment data is substantially worse than "official" statistics imply and about to get much worse. We clearly need thoughtful and effective policies to change many destructive incentive structures which kill jobs here - I hope we can muster the best of America's ideas on that front and implement those policies asap!

Jan 12 01:14 AM

[Al-USA:]

Good article by the author and good comments by many of the comment writers.

However, the most important thing is not being discussed, in my opinion. It seems to me that we are "seeing the trees but missing the forest". Take off your capitalist centric "blinders" for a minute, and consider that our economy was about 70% consumer driven. As such, the quote below from Economist Robert Reich makes alot of sense as to how we got to the present recession/depression:

robertreich.blogspot.c...

"
What's going on? Let me explain as clearly as I can.

American consumers are coming to the end of their ropes and don't have the buying power they need to absorb the goods and services the U.S. economy is capable of producing. This is likely to mean fewer jobs, which will force Americans to pull in their belts even tighter, leading to still fewer jobs – the classic recipe for recession. That recession may turn into a full-fledged Depression if fiscal and monetary policies can't make up for consumers' lack of buying power. And there's reason to worry they cannot because consumers are in a permanent bind. They're deep in debt, their homes are losing value, and their paychecks are shrinking.
"

"
Under these circumstances, the usual remedies won't work. Wall Street bailouts have no effect because housing prices continue to fall, and the Street is sitting on a giant pile of bad debt. Tax breaks for business won't generate more investment in factories or equipment because demand for their products what emerges from the factories is dropping. Temporary fixes like a stimulus package that give households a one-time cash infusion won't get consumers back to the malls because they know the assistance is temporary and their problems are permanent. They're likely to pocket the extra money instead of spending it. Additional Fed rate cuts might give consumers access to somewhat cheaper loans, but there's no going back to the easy money of a few years ago. Lenders and borrowers have been badly burned. The values of houses and other major assets are dropping even faster than interest rates can be lowered. Growing numbers of homeowners owe more on their mortgages than their homes are now worth on the market.
"

"
We're reaping the whirlwind of many years during which Americans have spent beyond their means and most of the benefits of an expanding economy have gone to a relatively small group at the very top. Adjusted for inflation, the median wage is below where it was in 1999. The nation's median hourly wage is barely higher than it was 35 thirty-five years ago. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. The rich, meanwhile, can't keep the economy going on their own because they devote a smaller percentage of their earnings to buying things than the rest of us: After all, they're rich, and they already have most of what they want. Instead of buying, they're more likely to invest their earnings wherever around the world they can get the highest return.
"

"
The debate over widening economic inequality of income and wealth in America usually pits fairness against growth. Conservative supply-siders contend that the people at the top not only deserve to be richly rewarded because such rewards encourage them to invest and innovate, and thereby benefit everyone else. Liberals concede that some inequality may be necessary to encourage growth but that we have long passed the point where it is either necessary or fair. But the reality we're now facing poses a different question: Can we have any growth at all when income and wealth are so unequal that most Americans can no longer buy what they produce?
"

'
The answer is likely to be no. Go back to the years just before the Great Depression and you see the same pattern. As I've noted before, Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from 1934 to 1948, noted this in his memoir "Beckoning Frontiers":
'

'
"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

Is the game about to stop again?
'

And there you have it. I don't know about you, but it sure does seem like the game is on the verge of sputtering out, and yes, the manufactured banking crisis by the corrupt financial elites, plus the trade deficit with China and rampant speculation which let to high oil prices is all part of it, but try to see the forest for the trees: "successful" capitalism will always lead to depression and self-destruct for the reasons outlined above, in my opinion.

The cure is apparent but the political will is not there. This is a crisis of capitalism, and only sufficient political will will allow capitalism to continue to exist in the USA.

Feb 12 02:02 PM