Based on the figures from the Bureau of Labor Statistics, US unemployment was 5% in April. Those figures showed that 146.3 million Americans were employed in the civilian work-force and 7.6 million Americans were unemployed.
tt should not come as a surprise to economists that the weakest parts of the economy last month were construction, manufacturing, and retail. The segments with some growth were healthcare and professional services.
The US economy may be in a recession now. Some experts believe that growth will only slow modestly over 2008. Warren Buffett and George Soros have said that they think the downturn will be long and deep.
What happens if the recession deepens? How far could unemployment rise? In the 1973-1974 recession, real GDP growth dropped 2.1% and inflation moved over 10%. Some of the reasons for the move up in prices then also exist now, primarily very high costs of gasoline and food.
Over the period of the 1973-1974 recession, the DJIA dropped over 40%. Unemployment reached 8.7% in the second quarter of 1975. To great extent, it was a recession driving by incredible inflation. Increasing consumer prices are only starting to show up in the US economy today although they are evident in other countries like China.
The 1981-1982 recession was not marked by the kind of inflation which happened almost a decade earlier, but the downturn in employment was greater. In the fourth quarter of 1981, the unemployment rate hit 10.5%. Among teenagers the number moved over 28%. Among blacks it was 20%.
The critical difference between the make-up of the workforce today compared with the two earlier periods is that a greater portion of the employment now in the services and financial sectors. In 1983, much of the job loss came in the durable goods sector, especially machinery manufacturing and transportation equipment. Many of those jobs have moved overseas since then. During the early 1980s, the financial sector actually added a small number of jobs and services employment rose by about 800,000.
The difference between 5% unemployment and 10% unemployment in the US today is about 7.5 million jobs. If the US hits a very sharp slowdown in 2008 and 2009, the job loss would almost certainly come from sectors which are to a large extent different than they were two and three decades ago.
Which sectors will be hit the hardest?
1. It would not be hard to imagine that the financial sector, which did relatively well 25 years ago, could not shed another a million or more workers this year. This would include people in banks large and small, real estate, and brokerage businesses. Morgan Stanley said it would cut 5% of its work force. UBS has just announced 5,500 lay-offs. Bear Stearns has chopped 7,000 people as it became part of JP Morgan. The US economy employs about 8.3 million people in the financial sector and another 3.5 million in real estate. These pools of jobs could easily lose 10% of total, about 1.2 million people.
2. A deep recession would also wring more people out of the construction and home supply businesses. Over the last four quarters, less than 300,000 jobs have dropped out of those sectors meaning that there is still a likelihood of contraction. Total employment in the construction industry is over 7.2 million people. Most of those workers are contractors. The number of people involved in residential housing is down by 320,000 during the last year, but total workers on commercial projects are steady. In a deep downturn the construction of non-residential buildings will drop and the sector could drop by another 500,000 people.
3. The manufacturing sector has also been spared, losing only 200,000 jobs over the last year from total pool of 13.6 million. The auto industry lost many of its jobs more than a year ago due to buy-outs, but Ford, GM, and Chrysler have indicated that they may have to cut further. That will also affect suppliers of auto parts and assembly. The biggest cuts in manufacturing are likely to come in the heavy equipment industries. Watch for companies like Caterpillar and Deere to drop workers. A 4% rise in unemployment in this part of the economy means 550,000 jobs lost.
4. There are 15.4 million retail jobs in the US. That number is flat over the last year. Workers who sell general merchandise, food, and clothing make up most of these jobs. Companies including Sears and Home Depot have already announced their intentions to cut some outlets and jobs as same-store sales fall off. Even Starbucks is beginning to let people go. Many retail items which used to be normal purchases become a luxury when gas and mortgage costs eat into monthly income. Retail could be hit harder than any other sector. If unemployment grows 6% in these industries over 900,000 people will lose jobs.
5. Recessions usually hit the leisure and hospitality industries hard. Almost 25 million people work in hotels, recreation facilities, gambling, and restaurant businesses. As travel drops along with eating out, expect unemployment to move up at least 4% higher in these sectors. That is a million people.
The direction of the economy is still likely to turn on the mood of the consumer. With gas at $3.60 a gallon and the price of most basic foods rising with the cost of agricultural commodities, it is hard to look to the man on the street to help push GDP higher. Most of the lower interest rates given to big banks by the Fed have not been passed on to consumers in better mortgage, car loan or credit card rates. If the government planned rate cuts as a way to stimulate the broader economy, it has made a poor bet
Faltering consumer spending has already hit the automotive, airline, and retail parts of the economy hard, as if that is not already beginning to be evident.
The economy is also going to be hurt further by a financial sector which is increasingly bedeviled by problems which could become much worse. A number of subprime ARMs will reset in the summer. Mortgage defaults could still spike and drop the price of housing further. Large banks and brokerages may bleed more from their balance sheets due to falling prices of mortgage-related paper and a drop-off in the value of LBOs debt and consumer credit.
The idea that the economy could give up seven million more jobs seems far-fetched, at least for those who have not seen it happen before. It is easy to forget that within many people’s lifetimes, unemployment at the 10% level has occurred twice. And some parts of the economy, particularly housing and the financial services sector were probably not as bad off in 1972 and 1983 as they are today.
Douglas A. McIntyre
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