The result is a new business attitude and a business model that focus less on revenue growth and more on that part of the businesses that executives know they can control: their costs. This means cutting personnel (and also advertising) to improve operating margins and reflects their lack of confidence in the growth of the economy.
The consequence is that the U.S. economy, which was for decades the greatest job creation machine in the world, is taking longer and longer to replace the jobs lost in the recession.
In the 1970s and 1980s, it took as little as one year from the end of a recession to add back the lost jobs. After an eight-month downturn that ended in March of 1991, jobs came back in 23 months. After the downturn from the dot-com bust in 2001, it took 38 months. This time, it could take five years or more to recover all of the 8 million-plus jobs lost since the "Great Recession" began.
Employment will continue to fall into 2010, and perhaps through it. If the jobless rate peaks at around 11 percent, we will be lucky to begin a proper jobs recovery before the end of 2010.
What accounts for the growing lag times? Fundamentally, it is that households and businesses are stepping back from spending levels that were artificially pumped up by debt. American consumers realize they had been on a binge. The ratio of consumer debt to the nation's GDP rose to 97 percent in the first quarter of this year, up from 45 percent in 1975. Every dollar that scared consumers save is one less for consumption and output.
Then there are all those young people just entering the labor market. To keep the jobless rate from rising, the United States needs to add a net 150,000 jobs a month. No one expects we will generate anywhere near that growth.
Furthermore, in the past decade, globalization and deregulation have forced companies to focus far more on productivity and on controlling costs. This means they seek to produce far more with the workers they have. Simultaneously, factory automation is wiping out assembly-line work, and information technology is making many white- and pink-collar jobs extraneous. Finally, companies are moving operations abroad to take advantage of cheaper labor in places like China and India. American workers are working harder, given their concern over job losses that have averaged 135,000 a month for the past three months. That's better than the 740,000 jobs lost in January, but it is still relatively high at this point in a recession.
We must face the hard fact that many of the lost jobs are gone forever. In this cycle, 56 percent of the currently unemployed have permanently lost their jobs, according to Ned Davis Research. These people have lost their jobs because plants have closed, work has moved overseas, or companies have gone out of business. This compares with an earlier peak in 1982 and 1991 of 43 percent.
As Fed Chairman Ben Bernanke confirmed, this recovery is shaping up to be a jobless one, just like the last two. The conventional unemployment rates look as if they will remain very high for years to come. Should there be an increase in demand, businesses will raise the number of employee hours worked, rather than adding new workers. This is reinforced by a recent Federal Reserve Board report stating that most of the participants in its survey anticipate it will be five to six years before the economy can convert fully to a normal job market.
Why is the long-term outlook for umemployment so dismal? One critical reason is the U.S. housing shock. The 30 percent average decline in home prices is far greater than the normal threshold of a 15 percent or greater fall in past sluggish recoveries. Add to this the drop in value of financial assets, and you have a colossal shock to household balance sheets, much greater than in previous recessions, adding up to $7 trillion. The result is a much bigger drop in nondurable consumer spending, on top of the much higher rise in the unemployment rate than in typical recessions.All of this reflects the fact that this downturn has been caused by a financial crisis. It therefore plays out differently from recessions that come about after businesses overinvest or when the Federal Reserve aggressively raises interest rates. When the machinery of finance grinds down, people cannot get enough credit to purchase consumer durables and businesses cannot borrow to invest and grow. In a study of recessions caused by financial crises, the unemployment rates rose dramatically higher—by an average of 7 percentage points, compared with the 5 percentage points we have experienced to date. Such crises last much longer—an average of 4.8 years. This one is at its two-year point.
Corrected on : Corrected on 12/07/09: An earlier version of this commentary misstated the year for which a budget shortfall is expected for states, cities, counties, and school districts. That shortfall is expected for 2010.