Yesterday I said I was reluctant to get over-optimistic about the recent slight upturn in employment data. This year may truly be different from the last few, but there’s a nagging feeling that we’ve seen this movie before. I’m not alone in the feeling. As 2012 dawns, Tim Duy summarizes the problem in one graph (emphasis is mine):
I have been hesitant to embrace the recent positive data flow – once bitten, twice shy perhaps. Something about the current dynamics that seems a little too familiar. Indeed, I felt something of relief when FT Alphaville came to a similar conclusion in the waning days of 2011. Cardiff Garcia reports on a Nomura research note that details a new bias in the seasonal adjustment process, noting:
Up next, writes Nomura, you can expect exaggeratedly strong readings from the Chicago PMI later this month and the next ISM manufacturing survey at the start of January.
I imagine it is premature to call the readings “exaggerated,” but both did surprise on the upside, as much data has of late. Read the whole piece – it is worth the time.
Indeed, flirtations with either excessive optimism or excessive pessimism were not richly rewarded last year, as on average the economy simply edged upward in pretty unremarkable fashion:
It seems reasonable to expect the same in 2012, at least as a baseline – a slow “recovery” that is really more of an adjustment to what appears to be the economy’s new equilibrium path, one that is decisively subpar to the pre-recession trend. I don’t believe that such an adjustment is necessary, as in my view it simply reflects a shortfall of aggregate demand. That said, the longer the cyclical downturn grinds on, the more likely it is that we will indeed see a new equilibrium path. A greater percentage of the cyclical unemployment will become structural unemployment or permanent shifts in the labor force participation rate. In addition, investments will go unmade as firms hoard cash. And, increasingly, policymakers will manage policy along the new equilibrium path, forgetting entirely the pre-recession path.
The gap in the above graph, the gap between the green trend line of what we’re capable of doing and the blue-red trend from Jan 2009 onward of we’re actually doing is the challenge. We are slowly becoming an economy that simply cut-off 7% or so of our economy in 2008 and we aren’t recovering it. Instead it increasingly appears that the 90-93% of the economy that survived, those of us still with good jobs, are simply going on our way leaving behind those who lost out a few years ago.
There are over 13 million unemployed workers. Over 5.6 million of them have been searching fruitlessly for a new job for more than 6 months. These are the people who got kicked off the American economy bus some time ago. Unfortunately, even at the recently improved rate of 150-200,000 new jobs per month, there won’t be any room on the bus for them again. Instead, the bus is moving on and they are left behind.
This is new. This is not the normal pattern. In past recessions, public policy, both fiscal and monetary, was managed to restore full employment rapidly after a recession. It didn’t always succeed but the effort was made. Now it is not. Now we focus more on long-term debt issues and spending concerns. Politicians run on platforms of fear of some future default or financial crisis. This despite the fact that the government is able to borrow at record low rates of interest.
We are on path to a “new normal”, a “normal” that says it’s OK to have millions of long-term unemployed who have no hope. I don’t think I like the “new normal”.