In this 3 part series, I am examining the mounting evidence that contrary to the accepted wisdom that we will have a "jobless recovery" where GDP turns up anemically but unemployment stubbornly rises, the recovery from this recession might not be "jobless" at all, but particularly in its earlier portion may feature quite robust job growth as the GDP starts to grow probably right now.
In Part I of this series, I discussed how new unemployment claims have recently been declining steeply just as after the 1974-1982 recessions, and unlike the two "jobless recoveries". In Part II, I discussed how after previous recessions' deep declines in manufacturing, employment has snapped back quickly in the subsequent recovery.
In this final installment of this series, I examine the demand side of the ledger; specifically how the 10% decline in consumption since "Black September" of 2008 has created pent-up consumer demand, especially for durable goods.
In last year's "Black September", among other things the Treasury Department took control of Fannie and Freddie; Wachovia Bank, Washington Mutual, National City Bank,Merril Lynch, and Lehman Brothers all failed or were sold to others; , and the government backstopped AIG. But the real damage was triggered by the panicky destruction of consumer confidence accomplished by Paulson, Bernanke, Bush and the Congress, as Americans were warned that the economic world faced Armageddon in only a matter of days. What happened then was typified by this quote from a prominent auto dealer:
on about September 10, we saw our business fall off 30-35%.
Last fall, consumer demand fell 10% almost instantly, as frightened Americans decided to rein in their expenses. This essay will argue that a mirror image recovery in consumer demand is not out of the question.
Here are some headlines to remind you of the panic that set in last September:
- Sept 19
- Treasury to insure money market funds (after a prominent fund had "broken the buck" and there was a "run" on other funds)
- From the NY Times: Congressional Leaders Stunned by Warnings
As the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first. Senator Christopher J. Dodd [said] the congressional leaders were told "that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.
- Sept 21
- Paulson announces $700 Billion bailout plan
- Sept 23
- report: hedge funds suffer mass redemptions
- Sept 24
- From the WSJ: Bush Addresses Bailout Plan
President George W. Bush on Wednesday warned Americans and legislators reluctant to pass a historic financial rescue plan that failing to act fast risks wiping out retirement savings, rising foreclosures, lost jobs, closed business and "a long and painful recession.
- From the NY Times: President Issues Warning to Americans
- From the WaPo: Bush: 'Our Entire Economy Is in Danger'
Bush painted a grim picture view of the future if Congress doesn't act, but he really didn't address how the plan would work. Bush did comment that the plan was to buy assets at the current low price, seemingly contradicting the comments from Bernanke and Paulson earlier today that they would buy at above the current fire sale prices
- Sept 27
- From MarketWatch: Bush confident of financial rescue plan bill 'very soon'
President Bush said Saturday morning he's confident that Congress will pass a bill ... "very soon." ... The president also stressed ... "our entire economy is in danger"; Negotiators from Congress and the administration are returning to talks Saturday with an eye toward finalizing a deal by Sunday.
As Calculated Risk said at the time, after one particularly panicky speech by George Bush,
it might motivate people that haven't been paying attention to say: "Wow, this is bad. Let's make sure our money is safe, and watch our expenditures." And that could lead to a deeper recession."
And indeed American families abruptly and severely cut spending.
As a result, while Americans as a whole only lost 5%-6% of their income, but car sales did not go down 6% -- they went down 40%! In short, fearful of losing their jobs, and fearful of the future, Americans panicked and started to save, much more in the aggregate than the immediate risks called for (because no individual or family knew if they were going to be among the ones thrown out of jobs or not). Once that fear passes -- once Americans feel confident that the economy is growing instead of contracting -- a mirror image quick increase in demand to the "Black September" plunge of last year cannot be ruled out. There is a 5% boost to consumer spending that is immediately available (I'm not advocating for a 0% savings rate, merely pointing out that some of that savings can in fact be released).
For example, Dr. James Hamilton of UCSD has noted that
"recent sales levels for motor vehicle appear to be significantly below normal scrappage rates, and [ ] a big rebound effect is quite possible."
Similarly, Calculated Risk has noted that the
"turnover ratio for the U.S. fleet [of cars] ... for January  is 27 years, by far the highest ever. The actual in December was close to 24 years. This is an unsustainable level...."
In the graph below, I show auto sales (dark blue) durable goods orders (light blue), and retail sales (green) vs. total employment (red). All are normed so that July 2007 = 100:
You can see that auto sales have fallen from 16m to 9m, or roughly 40%. Durable goods have fallen off 30%. Retail sales in general fell over 10% in the last year. It is important to note that while durable good orders are a leading indicator (telling us what happens next), and somewhat mirror auto sales; both retail sales and employment are coincident indicators, telling us where we are now. Note that retail sales and employment took awhile to catch up with the slide in durable goods and auto sales.
It is true that this represents a stunning 10% collapse in consumer demand -- but it also means that 10% of an entire year's consumption constitutes pent-up demand, which might be released as soon as consumers feel confident again. Even with a 10% unemployment rate, that means that American consumers have roughly 94%-95% of the purchasing power from their income that they had a year ago. We know where the missing 5% has gone -- into savings, as shown by the personal savings graph below:
If auto sales, durable goods sales, and general retail sales begin to pick up quickly, the above discussion of manufacturing hours suggests that, unlike the jobless recoveries of 1991 and 2001, there could be a very robust rehiring of workers in the residential, auto, and other durable goods producing industries, at least until such point as plants are operating at full capacity.
This effect may be enhanced by the effect of the ongoing, rapid reduction in sellers' inventories. Dr. James Hamilton has laid out this aspect of the case for a V Shaped Recovery. I encourage you to read the entire article, but it can be summarized as follows:
"[O]ften a sharp economic downturn is followed by an equally sharp economic recovery. One reason for that is the liquidation of inventories that accompanies any recession and restocking that takes place in recovery.
"The typical pattern is for inventory investment to fall well below trend during an economic downturn. ...[S]ince the current recession began in 2007:Q4 ... the level of inventories is lower than you would have expected in the absence of a recession by about ... 0.91% of one year's GDP. Add that restocking to the normal [ ] inventory investment that we'd expect ..., and you get a possible contribution of inventory investment of ... 1.12% of GDP during the first year of the recovery.
"If we are looking at the growth rate of real GDP, which is how we usually think about these numbers, the potential contribution of inventory investment is even more dramatic. If inventory investment goes from subtracting 0.49% from GDP (as it did over the last 4 quarters) to adding 1.12% to GDP ..., the contribution to the growth rate of real GDP would be 1.12 - -0.49 = 1.61%."
In other words, "just-in-time" inventory systems will jump start any recovery just as they accelerated the 2008 downturn. Interestingly, Dr. Hamilton supplies a chart indicating that inventory replenishing was significantly higher during the recoveries after 1974, 1980, and 1982, than it was for those after 1970, 1991, and 2001 -- in other words, correlating exactly with V-shaped vs. "jobless" recoveries.
Just last Friday, the Economic Cycle Research Institute, which was in business during the Great Depression, whose metrics include that period, and which has been -- correctly, in retrospect -- pounding the table about an economic turnaround later this year since March, reported that:
its yearly growth rate surged to a 26-year high, suggesting that recovery will commence at the briskest pace in decades, a research group said on Friday.... [T]he index's annualized growth rate leapt to a 26-year high of 13.4 percent from last week's five-year high of 10.4 percent, which ECRI originally reported at 10.5 percent. It was the index's highest yearly growth rate reading since the week to Aug. 26, 1983, when it stood at 13.9 percent.
"With WLI growth surging, the odds are rising that the early stage of this economic recovery will be stronger than any since the early 1980s," said Lakshman Achuthan, Managing Director at ECRI.
"Next year, looking back you'll see that GDP, industrial production, sales, and even non-manufacturing jobs growth -- where 91 percent of Americans work -- began rising as recovery took hold," Achuthan said.
ECRI is in the forecasting business only. They do not sell stocks or bonds to the public. They have no reason to mislead their customers, and they are well aware that they are making a once-in-a-generation call.
In conclusion, in these diaries I have argued that if there is a relatively rapid uptick in consumer demand, in the face of depleted inventories of durables and consumer goods, where factories have cut employment to the bone, then employees in all sorts of industries might be hired back quickly, causing a "V" shaped Jobs Recovery.
How will we know if a "V" shaped jobs recovery is occurring? First, Year over Year Leading Economic Indicators must turn positive -- which will almost certainly be reported later this week. Once that happens then I suggest that 4 series -- all of which have the virtue of being released within a week after the end of the month on which they report -- will tell us pretty quickly whether we are having a "V" shaped or "jobless" recovery:
- (1) monthly nonfarm payrolls: a gain of under 50,000 a month means a jobless recovery, gains over 100,000 within 3 months support a more "V" shaped recovery.
- (2) monthly auto sales: annual sales rising less than 125,000 a month means lackluster consumer durables spending, over 200,000 supports a "V" shaped recovery.
- (3) monthly manufacturing hours worked: an average rise of only 0.1 hours per month means a lackluster increase in plant use, over 0.15 supports a "V" shaped recovery.
- (4) the ISM manufacturing index: a quick expansion of manufacturing should be supported by the index rising to at least 60.
Since I originally posited the above 4 tests on the Bonddad blog last month, both #2 and #3 have been reported in accord with the "V" shaped scenario, but #1 still showed 250,000 net jobs lost, and retail sales declined slightly yet again.
Let me reiterate my concern about the lack of wage growth for average Americans. So long as wage growth remains weak, any recovery will not be robust in the longer term. As Bonddad and I previously argued, this Administration should create a new WPA. Additionally, with wages veering dangerously close to deflation, the Administration also needs to Put the Jam on the Bottom Shelf where the Little Man can reach it, in the form of direct cash rebates targeted at average Americans, until a recovery takes hold. Finally, let me repeat that I am not saying that we will have a "V"-shaped jobs recovery -- only that a surprisingly substantial case can be made that it might indeed happen.