My Two Cents - "A Sobering Dose of Reality"

09/05/2008

Perhaps the worst part of the report though were the revisions for the past two months. June and July had previously been called the bottom of the job market by some pundits in the financial media. August’s report showed not only that June and July were worse than originally thought, but that there is no indication of a bottom.

Here are some of the lowlights of the report:

• Manufacturing continued to lose jobs – 61,000 in August alone.
• July’s nonfarm payrolls were revised downward by 58,000
• July’s service sector jobs were revised downward by 47,000

Keep in mind that these are official numbers, tabulated using methodologies that have been shown to have more holes than a good piece of Jarlsberg Swiss cheese. In any case, the employment situation is bleak, initial claims for unemployment are well over what are generally used to ‘call’ a recession, and even worse, these job losses are causing an increase in individuals raiding retirement savings accounts.

That the government is an area of employment strength should not come as a surprise. The term ‘New Deal’ has been heard more and more often in economic discussions referring to the fact that the government is going to have to spend a whole lot of money to keep the economy stumbling along, much in the way it did during the Great Depression. Unfortunately though, the government of the 21st Century is much different from its 1930’s predecessor. This government is itself saddled with debt – the same problem which is choking off our economic growth. Blame for the current malaise is being passed around with a dizzying quickness and unfortunately, most of the causes that are cited are merely symptoms of the underlying problem as opposed to the actual problem itself.

The real problem put very simply is that one cannot borrow and spend their way to prosperity at any level. Sooner or later the bill must be paid and when that happens, the phony prosperity is over. So the real take home message about the jobs report is that we’re in New Deal mode. We’ve been in this mode for some time and will continue to be there. The bill is coming due. It cannot be avoided. The goal of our leaders at this point is to postpone the due date as long as possible.

It is quite amazing when one considers the shenanigans, distortions, and giveaways that must occur to engineer a 3.3% growth rate in GDP along with the concomitant perception of prosperity. The further along we go along this path, the more intense the information engineering will become. However, there is a proverbial brick wall; an end to the effectiveness of misinformation. It has been said that it is a recession when your neighbor loses his job; it is a depression when you lose yours. As the trend of joblessness continues and those that remain employed have to pick up part-time work to keep even a semblance of solvency in their personal balance sheets, it will become increasingly difficult to convince Americans that there is prosperity abound. The loss of a job has a way of delivering a return to reality – in an instant. While it can become rather easy to justify spending in excess of your income when there is an income, it is another matter entirely when that income is removed.

Today’s employment report is a sobering dose of reality. Unemployment, in my opinion, supercedes all other leading economic indicators because it affects the very bedrock of economic success in this country – the American consumer. This reliance on spending is what happens when you have decades of overconsumption and decreasing production. You come to rely not only on consumption, but on ever-increasing consumption in order for the economy to ‘grow’.

The American consumer has shown an almost miraculous ability to continue to spend despite collapsing home values, mediocre (at best) returns on investments, and already oppressive levels of debt. It is a good educated guess, however, that if the current employment situation persists we will finally see the end of the Age of Consumerism.

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.