This may get a bit rambling because much has happened since the holidays, and to break these issues into separate posts would only assure that all but the most recent would quickly scroll out of view.
So let’s begin with the big economic story of the day – the employment report. The headlines read something like “Economy adds 155,000 new jobs; unemployment rate holds at 7.8%.” Regarding the latter claim, it’s only technically true because the figure is rounded to only one decimal place. Unemployment actually rose by 0.1%, from 7.75% in November to 7.848% in December. That’s thanks to a paltry increase in the employment level compared to the growth in the labor force. Unemployment remains stuck in the “new normal” of about 8% (the official “U3” rate, manipulated to understate unemployment by claiming that more and more people drop out of the labor force) or, more accurately, around 10-1/2% when the labor force is held steady at a percentage of the population, which is constantly growing.
Here’s the chart: Unemployment Chart (Notice how “U3” has been trending down, creating the illusion of a recovering economy, while “U3a” is holding steady around 10.5% – a more accurate depiction of a sour economy stuck in neutral.)
Per capita employment, the employment level as a percentage of the population, remains near its lowest level of the recession. Here’s the chart: Per Capita Employment
And take a look at this chart: Labor Force & Employment Level. Notice that the employment level remains several million below the start of the recession, while the population and labor force have grown by 13 million and 6 million respectively. In other words, not a single worker (out of six million) added to the labor force in the last five years has found work. In fact, three million workers have lost their jobs in the last five years.
And don’t be fooled into thinking that things will improve this year. Though the “fiscal cliff” deal made permanent the Bush tax cuts for about 98% of Americans, it didn’t stop the payroll tax from rising by 2%. So virtually every American worker took a 2% pay cut on January 1st. That’s likely to shave about 1% from GDP – not good for an economy that, by most estimates grew at only a 1% rate in the 4th quarter. In other words, the economy is likely to stall for that reason alone, not to mention the big spending cuts that were delayed by only two months.
But there’s bigger reasons brewing to be pessimistic about the economy. We’re facing another debt ceiling crisis in less than two months. The last time this happened, in August of ’11, the stalemate in Congress very nearly drove the nation to default. Markets plunged violently and the economy very nearly sank into recession again. This time, it could happen. President Obama has already said that he won’t negotiate over the debt ceiling, and House Republicans have already signaled that they won’t raise it without getting big spending cuts in return.
Secondly, the Federal Reserve is getting cold feet about its quantitative easing, which has pumped $3 trillion into the economy in the last few years. Fed governors are worried about unintended consequences. It may be no coincidence that their concern is intensifying as the debt ceiling fight approaches. They may be worried that the Fed’s massive holdings of treasuries may make default seem less scary to lawmakers, who may rightly believe that the U.S. could choose to default selectively on only the debt held by the Fed, sparing foreign investors from any pain. That would be a truly dangerous precedent. So, although one of my “long shot” predictions for 2013 was that the Fed may reverse course, only 4 days into the year we’re already hearing rumblings that it could happen. Any of these scenarios – big spending cuts, another near- or actual default, or an end to quantitative easing by the Fed – would surely drive the economy into recession.
The economy is painted into a corner from which there is no escape without tackling the trade deficit that put it there in the first place. Mark my words, the economic gimmicks that have been used to create an impression of a recovery following the Great Recession have just about been exhausted. The economy we have right now – the new normal of high unemployment – may be as good as it gets for a long time.