Lots of Noise, But No Recovery

by: Gregor Macdonald

The State of California reported a loss of 29,000 non-farm payrolls in May. Actually, California added 88,000 jobs in May when using the total employment data for the month. However, as I have pointed out over the past year, these oscillations are just noise. Our nation’s largest state faces a protracted, structural level of unemployment that renders these month to month rises and falls unimportant. The over-focus on this data by the media, however, reveals an ongoing conceptual problem currently afoot in the US: the persistent belief we are in a standard, post-war recession.

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The above chart explains why 48% of Americans now believe the economy is, instead, headed into a depression. Depression, not recession, is the correct economic term for the following set of conditions: Structural unemployment, high levels of indebtedness, debt deflation, and the failure of the economy to recover through the normal channels of housing, autos, and through monetary policy. In short, demand cannot restart because its constrained by debt.

In May of 2011, the total level of employment in California at 15.947 million was actually lower than it was in May of 2000, at 15.975 million. That’s not only a lost decade, but most important of all, that’s an entire decade in which the obligations of pension funds, state debt, private debt, and costs rose — but can no longer be supported by wage growth or revenues. A depression need not be a Great Depression. However, a depression is certainly distinct from a recession, the business cycle variety that marked the post-war era.

It frankly doesn’t matter that some states, or even the United States, created non-farm jobs since the lows of 2009. The US economy is a large system that employed over 146 million at its peak last decade. Now, having added nearly 30 million to its population over the past 10 years, the US employs 6-7 million people less than in 2005. The implications for the operating costs of this system, from Social Security to defense spending, are obvious. Thus, it’s a failure of analysis — an inability to comprehend scale — that leads people to conclude good news, or even bad news, from the month to month data. Indeed, calling a +30,000 jobs number on the national level a “disaster” has as little meaning as calling a +150,000 jobs number “good news.”

The US economy is in a deep structural hole, hobbling along with massive government spending that will not be repaired by these meaningless fluctuations in employment. Even Ben Bernanke and the Fed, whose optimism has continually been trounced, had to capitulate to these realities. April’s press conference, in which Bernanke downgraded theFed ’s forecast (again), was at least refreshing for its honesty. Let’s see if the Fed, in its meeting this week, steps back again — this time from its newly precarious forecast that the “second half of 2011 will be stronger.”