During the period stretching from the emergence of the subprime crisis into full view, in summer 2007, to the peak of the post-Lehman financial and economic collapse, during the winter of 2008-2009, the watchword of this column was IKGW – It Keeps Getting Worse. That reflected the ugly reality wherein the state of the markets and the economy, in the US and elsewhere, kept deteriorating faster than people – the general public and policy makers alike – could adjust to it. Eventually, the sheer magnitude of the policy response in the months following the Lehman bankruptcy enabled the governments to “get ahead of the curve” and to turn around first confidence and then the direction of economic activity, from nosedive to gradual stabilization and then to slow recovery.
However, the recovery has run out of steam over the last several months. This process has been gradual but remorseless. It is least apparent in the stock market, where corporate profits continue to climb and, in many cases, are approaching or even surpassing the pre-crash levels. On the other hand, it is least apparent in the labor market, where the supposed recovery has moved from being ‘jobless’, ie not adding new jobs at anywhere near the rate required to get the unemployment rate down, to being a non-recovery, in which the economy is shedding jobs again.
The erosion of the weak recovery in the labor market can be traced via a range of data, published quarterly, monthly and even weekly. Of the latter, the most prominent is the ‘initial claims for unemployment’, meaning the number of people who, in the relevant reporting week, made a new claim for unemployment benefits. This number jumps around a lot, so the best way of viewing it is through the four-week moving average, which shows what the average number of new claims was over the preceding four weeks. This climbed from a level of around 300,000 persons weekly in mid-2007 – reflecting the regular movement within the economy of people losing their jobs and, in due course, moving to new ones – to a peak of over 650,000 in early 2009. It goes virtually without saying that this latter level was without historical precedent, confirming that “the Great Recession” was just that – by far the worst recession since the Second World War.
During 2009, the level of initial claims gradually fell, reaching some 450,000 by the end of the year. Historically, this was still a very high level, on a par with that reached at the depths of previous recessions and thus far from what would normally be considered recovery levels. But the direction was firmly downwards, which meant that things were improving. In the forecasts for 2010, published around the turn of the year, virtually every analyst looked forward to a continued decline in the level of initial claims during 2010. Some noted that sub-400,000 levels would be needed if the economy was to actually start growing again.
The economy did grow, in terms of GDP, in late 2009 and early 2010 – and even in the second quarter of this year, although the rate of growth was clearly falling then. But the shocking thing is that even from the start of the year, the improvement in the initial claims data petered out. The numbers bobbed around, but they never fell convincingly below the 440-450,000 level. That spelled trouble, and by mid-year it was obvious to everyone that the labor market was signaling its determined non-participation in the economic recovery that equity investors were singing hallelujahs to.
Over the last couple of months, things have gotten much worse. Virtually every Thursday morning (US Eastern time) the weekly numbers are published, and the headlines announce a “surprise rise in initial claims”. It’s amazing, and ultimately absurd, how many times the analysts who predict this number every week – and predict a decline every week – can be surprised. Worse, most weeks see an upward revision to the data published the previous week, meaning that the number of new claims was actually larger than that originally reported.
Yesterday this process reached its inevitable outcome, when initial claims hit 500,000 and the 4-week moving averaged rose to 482,500 – its highest level since November 2009. The half-million level is a round number, but has no significance beyond that. The real issue is the trend, which is now unarguably negative. In fact, this is only a superficial aspect of the deterioration taking place in the US labor market. Far worse is the fact that once they lose their jobs and make their initial claim, people are finding it ever-harder to get a new one. That is the most important aspect of the dire state of the labor market, which is the key to the economy – because for most people, it IS the economy. On Main Street, jobs are far more important than housing, which in turn is much more important than the capital market. The politicians, especially all those up for re-election this November, are very well aware of this reality – but seem unable to alter it.
For many people that is unacceptable and their response is a determination to alter the political reality. As the summer winds down and the election season moves into high gear, Main Street is going to take on Wall Street for control of Washington.