Hard Labour for the US Economy

When the biggest economy in the world goes into a deep recession it is inevitable that the scale of the job losses hitting main street America will be enormous. But when over 600,000 jobs are shed in a single month it becomes clear just how severe the labour shake-out has been in the United States since recession started in earnest in the late autumn of 2007. The US labor market has shed four million jobs since Lehman collapsed in September 2008 and the last time the US economy shed as many jobs in a single month was in October 1949.

As our chart shows, the unemployment rate in the USA is now at its highest for a quarter of a century and there is worse to come since, even in a highly flexible labour market, unemployment is a lagging indicator of the economic cycle and will carry on rising even when recovery has started.

Jobs are being lost, weekly working hours are falling and temporary employment (the easiest cut to make for an employer?) continues to contract. Manufacturing and construction are shedding more than 100,000 jobs every month.

Two things strike me from the chart

One is that economic growth in the USA has been on a downward trajectory for some years now and the claims of a ‘new economy’ able to sustain non-inflationary growth in excess of 4 per cent a year which became the bold claim of the mid to late 1990s looks hopelessly optimistic with the benefit of hindsight. This is the recession that the USA ought really to have had in the early years of this decade.

Second is the speed and rapidity of the climb in unemployment. The national jobless rate rose by 0.4% last month and it wont take many more months of this for the psychologically important level of 10 per cent unemployment to be breached - 10 per cent is a commonly held benchmark for mass unemployment.

Perhaps the severity of the jobs cull is actually a sign of better times ahead? This downturn has been characterised by ruthless labour shedding and de-stocking by businesses both in the USA and also in the UK. Indeed the early months of our own recession have been prompted mainly by short term cut-backs in production and jobs as businesses large and small recognise the dangers of being left with a mountain of unsold products with little chance of financing them for an extended period. The priority has been scaling back production, cutting overhead costs and battening down the hatches.

If that means that more businesses are better placed to survive the downturn then we might see a slightly stronger recovery when the trough is reached and the various policy stimuli take effect.