Can The US Economy Eat Eight Million Jobs This Year?

Using the US government’s count, about 2.4 million people lost their jobs in America last year. That does not include people who have been jobless for an extended period and are no longer looking for jobs. In January, another 598,000 people were put onto the streets by their employers, moving the unemployment rate up to 7.6%.

According to MarketWatch, the average forecaster thinks the economy shed 640,000 jobs last month. Some of the estimates are well over 700,000. The impression that the employment situation is getting worse was confirmed by Ben Bernanke’s comments testimony to the Senate yesterday.

Analysts may admit to a frightening February unemployment rate, but most either believe that the economy is going to get better or don’t want to say in public what they think. While it is comforting to claim that the February numbers will be a bottom for employment erosion, that may not be the case. The joblessness rate could thunder higher between now and year-end.

During the 1980 to 1982 recession, unemployment went from 7.9% in October 1981 to 10.1% the following September. Over the two months after that it hit 10.8%. The notion that 10% unemployment will not arrive until next year, if it comes at all, is bogus.

The proposition that the stimulus package and new budget will create jobs may be  true. It is also true that not enough money will reach companies which actually have payrolls to have much impact on their hiring this year. No one knows whether the programs will work.  Since they are untested, particularly in an economy this large that is destroying itself this fast, trying to assess their chances of success is as tough as making a winning wager on which dog team will win the Iditarod.

The most important business dynamic that works against job creation in an economy dropping this quickly is the fact that every worker is a consumer. Layoffs are a vicious cycle that undermine the major pillar of any expansion. Consumer confidence drives the process that is the largest single component of GDP. In this recession, the trouble is compounded by an unprecedented lack of access to credit because of housing prices and the near-failure of the banking system.

The other root cause that bedevils any attempt to improve the job situation is that private enterprise is suffering from an unusually rapid loss of earnings. Corporate bankruptcies are beginning to rise sharply and even companies which have been considered rock solid such as GE (GE) and Microsoft (MSFT) admit that their core businesses are being hurt badly and will not guess about when the situation will improve.  Large companies have gotten into the habit of saying that they cannot forecast earnings because they have “limited visibility.”  In most cases that means they cannot predict their sales beyond the current quarter.

The awful result of doing the math about job loss is that the monthly average increase in unemployment this year could be 650,000 to 700,000 jobs. Between the end of last year and next New Year’s eight million people could be put out of work. The fact that the number is staggering does not make it improbable.

The government’s plan to create jobs is not set up to cope with a situation where jobs are lost at the rate of two million a quarter. Even advocates of tax cuts would have to admit that the money that it would add to business and consumer wallets would not make a great deal of difference in the next several months. That may be academic. The Administration is proposing a modest cut for most people, but it is just that—a modest cut. Businesses which will be taxed at a higher rate will have to decide whether that drain effects how many people they will have on their payrolls or not.

In the final analysis, the market may have to go through the tragedy of a sell-correction which combines agony and duration. What may happen is that the economy will run through a cycle in which unemployment increases until labor costs fall to a nearly unimaginable level. Businesses will begin to hire again because they will have access to skilled workers at a fraction of what those people would have cost them a year ago. If that is the solution to the labor problem, the end of the recession is a long march from here.

Douglas A. McIntyre