In an interview with Bloomberg prior to the release of key unemployment data, Nobel Laureate Edmund Phelps discussed what he sees as the “new normal” for the U.S. economy. His view is that the U.S. should prepare for times of greater than normal average unemployment, and the economy as a whole has less ability or urge to innovate, something he termed dynamism.
While the economy grew the most in two years in the third quarter and the decline in payrolls may bottom in the first quarter of 2010, that doesn’t change the fact that the economy has lost its “dynamism,” Phelps said.
The jobless rate in the medium-term may settle at between 6 percent and 7.5 percent, said Phelps, who was speaking before the payrolls data was published. That compares with a 4.9 percent average in the decade through 2007.
Economists’ Battle
“As output goes up, employment is going to continue to lag,” said Phelps. “Firms have gotten rid of a lot of their workforce cushion, so to speak, and they’re going to do without that for a quite a while.” — Bloomberg.com 11/6/2009
After Phelps’ interview we learned that the closely watched release of non-farm payroll data indicated that the real economy remains distraught. About 190,000 jobs were lost in October bringing the unemployment rate four-tenths higher to 10.2%. So much has been made of the unemployment rate crossing the 10% line, but that is largely a psychological barrier that reveals little new information. The fact remains that this is the worst labor market that we have seen in at least 26 years and possibly longer before all is said and done. Everyone knew that the labor market would lag the recovery in the economy, but for how long?
Over the last eight months, the market has brushed aside job losses and other bearish economic data in favor of the recovery thesis. Job losses and the like are acceptable because there are other signals that growth will soon return. Considering third quarter GDP yielded a return to growth thanks in no small part to government stimulus efforts, some market observers must wonder if jobs losses even matter then days. The quintessential question that investors must ask in this circumstance, are we in the midst of a tremendous bear market rally or is this going to be a jobless recovery?
It seems from where we are now that there is little possibility for something other than these two scenarios. The deepest recession since World War II has finally begun to show growth based on the most widely accepted measure of economic health, the Gross Domestic Product. Yet, businesses are not willing to hire new workers, and a recent jump in productivity numbers suggests that existing workers are able to pick up the slack. It has been about half a century since productivity has accelerated as quickly as it has in the past two quarters. We hope that this will lead to companies hiring more in the next few months in order to expand and grow, and temp worker hiring has risen for three straight months. That being said, most analysts and economists are not expecting net job growth until the beginning of next year at the earliest.
At Ockham, we tend to agree with Phelps’ assessment that this recovery is running out of gas. There is simply too much strain on the economy from the growing numbers of unemployed to expect that consumer spending will boost us during the holiday season. Similarly, foreclosure filings continue at a very rapid clip, straining banks and the housing market in general. The stock market has enjoyed a fabulous run in the last few months, but it appears to be petering out. We avoid making predictions about short term market movements, but one has to wonder over the next few months where will the upside in the market come from? With the real economy still limping along in a recession mentality, where will the rally turn for a refueling?
