A painful job to do

Nov 7th 2008 WASHINGTON, DC From Economist.com
As unemployment surges Barack Obama will have to take some awkward economic decisions
IT HAS been a sobering end to the week for Barack Obama. In his first two days after winning election he was greeted by a 10% plunge in the stockmarket. Then on Friday November 7th he got the news that unemployment had shot up to a 14-year high of 6.5% in October and non-farm employment had plunged by 240,000 from September.
The headlines are bad enough, but the details of the report paint an even more alarming picture: they suggest that the pace of erosion in the labour market is accelerating, and that it had begun to do so before the failure of Lehman Brothers in mid-September sharply worsened the global financial crisis.
The job losses in September were revised up to 284,000. Non-farm employment has fallen by 0.5% in three months, on a par with the worst of the 2001 recession. A worse picture emerges from the unemployment rate, which is based on a separate survey of households. It has risen by 1.5 points in six months, the most rapid rise in such a period since 1982. The fact that unemployment gives a gloomier impression than employment suggests that people who fail to find work are not leaving the labour force as much as they typically did. That may be because losses on retirement savings and homes have deprived many of the option of sitting out of the workforce for a spell.
As for the timing, Michael Feroli of JPMorgan Chase notes that the September data were gathered in the week beginning September 7th, in the days before Lehman failed. “Whereas it had been thought the financial crisis pushed a teetering economy over the edge, it now looks like that crisis kicked an economy that was already down,” Mr Feroli wrote.
The job losses were widespread: 49,000 from construction, 90,000 from manufacturing (although 27,000 of those were caused by a Boeing strike which has since ended), 38,000 from retailers, and 16,000 from leisure and hospitality. Only education, health care and government showed gains, and this latter growth may not be sustained as states tighten their belts. Rising unemployment is capping wage gains: hourly pay rose by just 0.2% from September. It is up by 3.5% from a year earlier, but is bound to slow.
Grim as it is, the report says little about where the economy goes from here. The pattern of job losses is similar to what occurred after the September 2001 terrorist attacks, a period that actually marked the bottom of the recession (though not of job losses) as unprecedented fiscal and monetary firepower was brought to bear. The financial meltdown of this past September and October was in some ways similar: the collapse and near collapse of a series of financial institutions; the heart-stopping plunge in the stockmarket, and the death and resurrection of the $700 billion bail-out package transfixed the country and may have kept consumers out of shops.
For the picture to get better, the stimulus from monetary and fiscal measures must take hold. There are some signs of that, albeit small. The vast expansion of Fed lending, Treasury capital injections into banks and Federal Deposit Insurance Corporation bank-debt guarantees are producing results. Three-month dollar Libor—a handy measure of banks’ willingness to lend to each other—has fallen sharply from 4.82% on October 10th to 2.29% on Friday, a four-year low. A handful of companies have been able to issue bonds, and emerging-market currencies have risen off their lows, as the availability of $200 billion in short-term credit from the Fed and IMF eases fears of a liquidity squeeze. And on the real economy front, the National Association of Realtors said on Friday that its index of “pending” home sales—for which contracts have been signed but not settled—fell by 4.6%, which actually leaves the upward trend in sales intact, says Ian Shepherdson of High Frequency Economics, a consultancy.
The prospects for a second stimulus package (on top of the tax rebates sent out earlier this year) will rise, as a result of the jobs data. Nancy Pelosi, the speaker of the House, has proposed that as much as $100 billion be passed in a “lame duck” session before the new Congress is seated early next year. It would include extended unemployment benefits, aid to the states for health-care programmes, more infrastructure spending and other items. She also wants to see another package soon after Mr Obama becomes president on January 20th, that would include permanent tax cuts. Presumably this would incorporate the $500 per worker, $1,000 per family “Making Work Pay” tax credit that was a centerpiece of Mr Obama’s campaign platform.
Mr Obama, who was due to meet his Transition Economic Advisory Board on Friday, may press for even more. But with his first budget deficit likely to be over $1 trillion, he also needs to calm investors by matching this up-front stimulus with a long-term plan to get the budget back in balance. Given the high price tag of his own many promises, the withering impact of the recession on tax revenue, and the looming surge in retirement and medical costs for retiring baby boomers, that is no easy act.