It’s a good thing for Barack Obama that he’ll have a good long honeymoon period. He’s going to need it.
One factor that the relentless bulls kept clinging to as house prices plunged and banks started going to the wall, was the idea that unemployment on both sides of the Atlantic was still low historically.
The fact that the level of joblessness is clearly a lagging indicator (job losses only start to rise when the economy is in trouble, not before) didn’t seem to occur to them. Well now they know.
The jobless rate in the US just keeps rising. Non-farm payroll employment fell by 240,000 in October and 284,000 in September (much higher than the original estimate of below 200,000). The only sectors which saw employment rise were health care and the public sector, which together added slightly more than 50,000 jobs. The service industries shed 132,000 jobs, including 38,000 in retail and 24,000 in financial services. Meanwhile, the number of workers moving to part-time hours rose by 645,000, to 6.7m.
So far this year, a total of 1.18m jobs have been lost. “This is what a deep recession looks like,” Lawrence Mishel, president of the Economic Policy Institute, told Marketwatch.com.
The unemployment rate is now standing at a 14-year high of 6.5% – that’s already higher than during the short 2001 recession. Paul Ashworth at Capital Economics reckons it will climb to 8.5% by the end of 2009 – a level not seen since the early 1980s.
The group also believes that although average earnings growth edged up to 3.5% year-on-year, it could drop below 2% in 2009. “Earnings could conceivably fall outright, which would make deflation an even more likely scenario,” says Ashworth.
The weak earnings growth “will likely further depress already grim expectations for the holiday shopping season,” said Richard Moody at Mission Residential. On top of this, pending house sales fell by more than expected in September, down 4.6%. “It’s hard to see how the economy can turn around when housing is still going down,” James Sullivan of UBS Securities told Bloomberg.
It certainly is. Lower house sales means falling house prices, which means tighter credit conditions and less money for consumers, which in turn means lower company profits and more job losses. Little wonder that Jan Hatzius at Goldman Sachs is now predicting the deepest recession since the Reagan era, reports Bloomberg. He believes the US economy will shrink 3.5% in the fourth quarter, and 2% in the first quarter of 2009.
Warren Buffett may think US stocks are worth buying now, but with the worst still to come for the US economy, we think there’s still some way to go. You can read more about this in our cover story in this week’s issue: What can America’s new man do?