This morning’s employment report has settled the question of whether the U.S. is in recession. With the unemployment rate jumping to 6.1%, the answer is unequivocally yes.
Now the question is: How bad will the recession get? The answer: Pretty bad. So far the jobs cuts have mainly hit construction and manufacturing. Over the past year, those two sectors have lost roughly 850,000 jobs.
However, the job disaster has not yet truly hit the rest of the economy. In particular, over the past year real estate is down only 39,000 jobs, commercial banking is down only 5,000 jobs, and securities and commodities is actually up 14,000. These industries have to make a lot of big job cuts to get to where they need to be.
What’s more, I expect a lot more job cuts in retail and wholesale trade. Consumers still have not yet fully adjusted their spending downward to the new realities. When they do, the bottom is going to fall out of retailing.
Finally, whatever impetus the U.S. economy was getting from exports is going to ebb away, as Japan and Europe are showing negative growth in the second quarter. That won’t help manufacturing.
My best guess is that the U.S. economy is going to experience a sharp downdraft in the rest of 2008 (think severe turbulence in an airplane), led by falling consumer spending and by falling employment. .The only cushion is healthcare and education (to some degree), But even those jobs will slow down as government budgets get tight.
The drop in oil prices will help a bit, but high energy costs have already done their damage.by sucking a lot of buying power out of the economy. To put it a different way, if you’ve paid $100 extra for gasoline, that $100 doesn’t magically reappear when gas prices go back down. It’s gone.
We are having to pay back for the years of consumer excess. And it won’t be pretty.