Below is one of the most daunting graphs I have come across during this recession. It is not nearly as complicated as it appears so don’t give up on it easily. The graph, from www.calculatedriskblog.com compares the amount of jobs lost during each of the recessions since World War II (1945) . . . and how long it took to get those jobs back.
Along the bottom axis are numbers which represent months. Along the left vertical axis are numbers which represent jobs lost as a percentage of peak employment. During most recessions, our country loses jobs for several months and then, during the recovery, those jobs return. In many of the recessions, there were a moderate number of jobs lost and regained within 24 months.
Distinctively crawling along the bottom of the graph is a bright RED line that represents the jobs lost in the current recession. At minus 6%, it is clearly the worst recession in terms of lost employment. In addition, it appears to be the most stubborn recession in terms of returning to peak employment. That is NOT the most disturbing thing to learn from this graph.
If you study the graph a little more, a worrisome trend becomes evident. Look carefully and you will see the past three recessions (brown, black and purple) and that each recession took a longer period of time to recover jobs than its previous recession.
Do you notice the trend?
1981 – 28 months to recover.
1990 – 31 months to recover.
2001 – 48 months to recover.
2007 – it appears it could easily take 5-6 years or more to recover.
In the past 30 years, it appears something has caused each recession to be more painful than the previous one. Massive increases in consumer household debt coupled with the globalization of labor are at the top of our list of culprits. Another graph from www.calculatedrisk.com illustrates how household debt as a percent of GDP has more than doubled since 1965, with the most significant increase occurring during the 10 years from 1998-2008.
It keeps getting more difficult to “spend” our way out of a recession when we have to use our income to pay off debts instead of purchasing consumer goods.
Meanwhile, jobs (mostly manufacturing) have gradually moved to other nations where manufacturing can be accomplished much more cheaply. At the same time, technology improved productivity such that it takes fewer workers to do the same job. Businesses take advantage of recessions by laying-off workers that were already becoming unnecessary prior to the recession and then not re-hiring them during the recovery. As we recover from this recession, businesses will re-hire only those workers that are necessary and other workers will have to find employment elsewhere, sometimes in a new industry, sometimes with a new career.
I keep hearing debate about whether we will experience a “double-dip” recession. Say what? To have a double-dip recession, there needs to be some significant improvement in the first recession. What we are experiencing is one big, long, painful single-dip recession. A stock market rally is not the same thing as an economic recovery. Unemployment is still hovering around 10%. Residential real estate hasn’t improved at all….there were 325,000 new foreclosure filings in July, the 17th consecutive month in excess of 300,000. Although the US consumer has an improved savings rate, we continue to have an unhealthy level of leverage. Housing prices are not recovering and will remain sluggish as long as unemployment remains high. Although housing prices are no longer plummeting, the “shadow inventory” of houses (houses that are not currently listed for sale but will likely still need to be sold) will keep a lid on any significant price increases for a long time. If unemployment increases, GDP begins shrinking again and the housing market continues to crumble, we are NOT in a double-dip recession….we are just in a continuation of a very nasty single-dip recession, sometimes known as a depression.
With mid-term elections less than two months away, don’t be surprised if the Obama Administration attempts another stimulus package soon in order to make the economy appear better. The democrats are faced with losing power in both the House and the Senate. The simplest and quickest way to generate economic activity is to announce that the Bush tax cuts will be extended beyond this year….at least for all but the obscenely, filthy rich. However, this is the most distasteful course for democrats who have railed against the Bush tax-cuts for years. Whatever course they choose, our guess is that the stock market will react positively. For that reason, we have been increasing our allocation to equity.
Speaking of the stock market, August took the S&P 500 back into negative territory for the year. A drop of 4.51% in August leaves the S&P 500 down 4.6% for 2010. Although we still don’t see solid signs of an economic recovery, we are seeing better relative values in the equity markets. At the end of August the interest rate on a 10-year U.S. Treasury Bond was 2.46%. There are MANY good companies whose dividend yields are well in excess of 2.46%. Yes, they may decline in value but, if you are looking for better cash flow and can turn your head away and not look at the price for a few years, you may find much better long term returns in the stock market.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.