Even with the stimulus, we could still see 15 percent unemployment

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In my previous column, I argued that the business cycle has more pain in store, even as unemployment grows. My goal in this column is to make a realistic appraisal of the possibility that unemployment could continue to rise after the $787 billion Federal stimulus spending runs its course next year.

The Federal government has taken truly unprecedented measures to reverse the recession and spark a new round of consumer and business borrowing and spending. It has borrowed almost six percent of the nation's GDP (the $787 billion stimulus) to spread "free money" in every city, county and state in the land. At the same time, it has essentially taken over the entire mortgage market, underwriting almost all new mortgages originated this year.

Both the massive stimulus spending and the $1.25 trillion mortgage support are slated to end next year. The trillion-dollar question is: will this $2 trillion re-inflate housing values, consumer confidence and thus consumer borrowing and spending?
As I argued earlier, the government is basically attempting to bypass the normal business cycle in which bad debt is written off and consumers pay down debt and save money. These savings provide the capital needed to spark the next cycle of investment.

The jury is out on whether the stimulus will revoke the business cycle. Consumers are still paying down debt, businesses are still seeing sales decline and while housing has stabilized, with 18.7 million vacant dwellings in the nation, the notion that housing is about to rise sharply in value is suspect.

What the government fears is a self-reinforcing feedback loop in which businesses pare payrolls and consumer spending drops, which causes more businesses to close, which causes more unemployment and lower tax revenues, further reducing consumer spending.

The key factors -- the confidence and goals of the consumer -- are difficult to measure. Now that U.S. households have lost some $12 trillion in wealth over the past two years, baby boomers are looking ahead and realizing they need to save more for retirement. And saving for six months or a year isn't going to cut it; they will need to save substantial sums for a decade to rebuild their diminished assets.

Households of all ages are more heavily indebted than in any previous era, so the notion that a new round of consumer borrowing and spending is in the offing next year is also suspect.

Rather than guess about unemployment in general, let's take a look at each category of jobs and look beyond mid-2010, when much of the stimulus will have been spent. In the worst-case scenario, the stimulus fails to revoke the business cycle and sales, tax revenues and incomes continue to decline. What would that mean for each sector of the economy? (All data drawn from Bureau of Labor Statistics report, The Employment Situation – September 2009.)

Construction (currently 6,038,000 jobs): While the Federal stimulus is pouring billions of dollars into repairing bridges and roadways, which will certainly support heavy-construction employment, the far larger categories of residential building/remodeling and commercial construction (offices, malls, warehouses, etc.) are overbuilt for years to come. (Recall that according to the U.S. Census, there are 18.7 million vacant dwellings in the U.S.)

So let's guesstimate that there will be 33 percent less demand for construction and a decline of 2 million jobs in this category.

Manufacturing (currently 11,719,000 jobs): Unfortunately, a tremendous amount of manufacturing goes into construction (glass, appliances, steel, etc.) and transportation (rubber, steel, components, semiconductors, etc.) both of which are in decline. As for selling abroad: exports are falling almost as fast as imports. Let's assume 1.7 million more jobs may be cut, leaving 10 million intact.

Retail (currently 14,700,000 jobs): Does anyone doubt that fully one quarter of all retail outlets are now surplus? Since retail has many part-time positions, perhaps we should estimate "fulltime equivalent" job losses. That is, if a store cuts everyone's hours by a cumulative 40 hours a week, that's the equivalent of one fulltime position being cut.

Let's guesstimate that 3 million retail positions will no longer be supported by sales/profits.

Professional and Business Services (currently 6,038,000 jobs) Legal and accounting services will suffer as businesses fold. Businesses will need fewer contract workers, fewer consultants, fewer financial services and fewer software upgrades. Let's guesstimate that another 2.5 million jobs will eventually be lost in this category.

Education and Health Services (currently 16,597,000 jobs): These have been the growth industries, along with financial services, during the past eight years. As millions of jobs have been lost, then millions of dollars of health insurance are no longer paid by employers, which means health care providers are getting squeezed along with every other category.

Here in California, college enrollments are being capped as deficits soar; the inevitable next step is to leave jobs unfilled as people retire -- one way or another, a reduction in total education employment. Let's guesstimate one million of private education/health care jobs get cut, perhaps not by layoffs but by retiring workers not being replaced.

Leisure and hospitality (currently 13,154,000 jobs): The sad fact is nobody needs to take a cruise or a vacation; both are the acme of discretionary expenditures. The U.S. economy could shed another 3 million jobs in this category.

Government (currently 22,403,000 jobs): Local government (cities, counties, states and agencies) added 12 percent more employees in the past eight years, and the free fall in tax revenues means those 12 percent of "new" government jobs will likely be cut -- and that's the best-case scenario. Let's guess that a total of 2.5 million jobs will be trimmed as tax revenues keep plummeting.

Adding them up, that's 15.7 million more jobs lost, which translates into about a 20 percent unemployment rate. Remember, there are currently 15 .1 million people unemployed, and a 9.8 percent unemployment rate (17 percent if you include those who are involuntarily part-time and those who have given up looking for a job -- see "Broader Unemployment Rate Hits 17% in September").

That's still not quite as terrible as the Great Depression's 25 percent rate, especially when we consider the much broader safety net now in place: unemployment insurance, Social Security, food stamps, housing vouchers, Medicaid, etc.

Even if the post-stimulus economy is only half as bad as this scenario, that still suggests there could be another 7-8 million jobs lost and an unemployment rate of 15 percent.

That possibility is sobering. A new cycle of investment will eventually take hold, but only after household balance sheets have been repaired and the nation has built up enough savings to fuel new investment.

Charles Hugh Smith writes the Of Two Minds blog and is the author of numerous books, most recently,
Survival+: Structuring Prosperity for Yourself and the Nation.
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