Sunday, June 28, 2009

Deja Vu

Source: Eichengreen and O'Rourke (2009) and IMF

Another Great Depression?
It is still to early to tell, but so far the current decline in global industrial output is closely tracking what took place 80 years ago (see graph above). Here in the U.S., we are running at less than two-thirds capacity. In fact, we are seeing a utilization rate last seen in the 1930s:

There will not be a bunch of new investment in industrial capacity until utilization gets back into the 80s. Meanwhile, employers appear loath to hire back laid-off workers. The average layoff has reached 24.5 weeks, a 60-year high:

Indeed, almost half of all displaced workers now collecting unemployment insurance will exhaust their benefits before returning to work (unless, that is, Congress borrows yet more money to extend the benefit period a second time). As a result, delinquent consumer loans, from credit cards to home mortgages, will likely increase, further pressuring the banks carrying those loans on their balance sheets.

Bank failures are becoming THE story in 2009. On Friday the Federal Deposit Insurance Corporation continued its weekly ritual of Whack-a-Bank, closing five more and bringing the year-to-date total to 45 (complete list here). Despite going on a hiring binge a year ago, the FDIC stills does not have enough bank examiners to keep up with the growing caseload. Thus, the implosion of the banking sector will play out in slow motion for at least the rest of this year--and probably beyond.

[update, July 31: The FDIC announced today the closing of five more banks. The total for 2009 now stands at 69, at least until next Friday.]

All of which makes the odds of an upside divergence in the topmost graph rather remote. [For a more detailed discussion of the headwinds facing the economy, check out John Mauldin's latest weekly newsletter--The End of the Recession?--and scroll down to The New Normal...]

Tuesday, June 23, 2009

Class of '09 Hits Job Market, Class of '69 There First

Look behind the headlines of May's unemployment figures. The "improvement" in the number of jobs lost was no improvement at all. Sure, the loss of 345,000 jobs in May sounds better than the 504,000 jobs lost in April. But let's get one thing straight: the May number does not replace the April number. It adds to it. Things have gotten worse.

And things have gotten worse, it can be argued, at the same rate. Hours were reduced for many retained jobs, as workers were sent home on unpaid furloughs rather than fired. The shortening of the average work week in May by 0.1 hours, spread over the entire workforce, was the payroll equivalent of 250,000 lost jobs. Add that number to the headline number, and we're back to approximately 600K, the norm for the last six months.

Digging deeper, we find that one part of the workforce is adding jobs: those 55 and older (see chart above). Their retirement nesteggs decimated by back-to-back busts in stock and home values, these folks are highly motivated to remain in or to re-enter the workforce. Their earnings will be used to rebuild net worth, not to consume. Displaced are Generations X, Y, and Z, who collectively lost over 6 million jobs over the past year. They would be the ones more likely to spend their paychecks, increasing the velocity of money and stimulating the economy. But ya can't spend what ya don't earn (and can no longer borrow).

With Baby Boomers cannibalizing the job prospects of younger workers, economic recovery will not come anytime soon.

Sunday, June 21, 2009

June 20, 2009
Monterey, MA