Job Losses Accelerate (But What Does It All Mean?)

Submitted by Rich Toscano on June 21, 2009 - 9:16pm

Between May 2008 and May 2009, according to the latest estimates, the San Diego economy lost 52,200 jobs. This 4 percent year-over-year decline is the fastest we've yet experienced during the current downturn.

The below graph shows the rate of job loss for the overall San Diego economy in orange. As usual I've also included the three sectors -- construction, finance, and retail -- that I have long contended grew unsustainably large as a result of the housing bubble. The green line indicates changes in employment outside the three bubble sectors:

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Submitted by carlsbadworker on June 21, 2009 - 10:50pm.

Is it possible to make a comparison graph for unemployment v.s. housing price? I don't think anyone disputes that unemployment is a lag indicator comparing to the general economy. However, some people are saying that it is a predictor for the housing market (i.e. housing price only rises when unemployment has declined). Unfortunately, it might be hard to find previous national housing price declines, so what about just for California?

Submitted by UCGal on June 22, 2009 - 8:23am.

I agree that unemployment is a lagging indicator for recessions. But given the fact that our economy has gone from being based on production of goods to consumption of goods, this time might be a little different. Even folks who have jobs are clamping down tight on their discretionary spending. Until the unemployment rate at least slows (2nd derivative) I don't see a turn around in our economy.

Submitted by jpinpb on June 22, 2009 - 8:33am.

That is a good point. We have limited our manufacturing of products. The biggest thing we've had as an industry for several years was manufacturing houses. With that sector down, we are back to having to rely on other manufacturing. That takes us back even further to before the dot-com era. With so many jobs outsourced, the climate has changed.

If we are a nation of consumers rather than production, we have to change the criterias accordingly to reflect that. At one time unemployment was a lagging indicator, but since the employment for probably a decade relied heavingly on the housing sector, we should factor in the consequences of that.

Submitted by Rich Toscano on June 22, 2009 - 8:51am.

carlsbadworker wrote:
Is it possible to make a comparison graph for unemployment v.s. housing price? I don't think anyone disputes that unemployment is a lag indicator comparing to the general economy. However, some people are saying that it is a predictor for the housing market (i.e. housing price only rises when unemployment has declined). Unfortunately, it might be hard to find previous national housing price declines, so what about just for California?

As you can see from the comments below yours, some people DO dispute this. :-)

As for housing and unemployment, I think calculatedrisk just had some graphs on this last week. The net of it iirc was that home prices don't start to really bounce back til well after unemployment peaks.

Rich

Submitted by Rich Toscano on June 22, 2009 - 9:02am.

UCGal wrote:
I agree that unemployment is a lagging indicator for recessions. But given the fact that our economy has gone from being based on production of goods to consumption of goods, this time might be a little different. Even folks who have jobs are clamping down tight on their discretionary spending. Until the unemployment rate at least slows (2nd derivative) I don't see a turn around in our economy.

Don't you think people clamp down on discretionary spending in every recession?

As to the argument about having become consumption vs. production based -- I agree that's an important structural change and it bears examination. However, this was already largely the case as of the last recession, and as you can see from the final graph unemployment lagged the recession dramatically. (I would make the case that the recession lasted longer than they say due to an underreporting of inflation vs. the way they reported it in the 90s and earlier -- but even considering that there was quite a lag).

Sometimes it is different, and I am open to the possibility that this time around, the relationship between recession and unemployment will be different. But I will need to see some supporting data before I believe that the pattern that held for every recession for the past 60 years no longer applies.

And btw, this is not to say that the consumption vs production thing isn't a big structural problem. I think it is, and that it will come unwound eventually (as will the Bretton Woods 2 monetary system that enables it). But this is not exclusive with the possibility of a cyclical recovery taking place in there somewhere.

Rich

Submitted by socalb on June 22, 2009 - 9:06am.

One nit to pick: We have never experienced an L-shaped recession in modern times.

If we do experience an L-shaped recession, I am pretty confident in saying that this time will be different.

Also, keep in mind that housing prices fell for 5 years after the last recession ended corresponding with a housing bust, so recession ends are generally a poor prediction of housing prices. Unless you're referring to an expected 5 years more in our SoCal housing bust.

in the 80's housing bust, housing prices fell for 4 years (in inflation adjusted terms) after the recession. In nominal terms, they were flat, but we were seeing very very strong inflation at the time, something that seems very very unlikely in the present scenario.

Chuck Ponzi

Submitted by jpinpb on June 22, 2009 - 9:11am.

Thanks for mentioning it. I was getting ready to comment about it. So many people talk about the bottom as if it will be a magical turn-around moment. That bottom can stay with us for some time to come if it is L shaped and there will be no question we'll be at bottom when it flatlines for a while. What few people talk about is what would be the impetus to make prices rise again.

Submitted by Rich Toscano on June 22, 2009 - 10:01am.

socalb wrote:

One nit to pick: We have never experienced an L-shaped recession in modern times.

If we do experience an L-shaped recession, I am pretty confident in saying that this time will be different.

Also, keep in mind that housing prices fell for 5 years after the last recession ended corresponding with a housing bust, so recession ends are generally a poor prediction of housing prices.

I never said otherwise... my point was about economic contraction, not housing prices.

Regarding the L-shaped recession... can you point me at data showing that A) unemployment peaks before the end of the economic contraction in such cases and B) this is likely to be the first L-shaped recession in modern times?

Like I said, I'm open -- but I need evidence.

Rich

Submitted by jpinpb on June 22, 2009 - 10:17am.

LOL. I'm open to believing a V-shaped recovery if someone tells me what the impetus would be for prices to shoot up again. :)

Will we all of a sudden have manufacturing again?
Will so many jobs be created and will also cause incomes to double?
Will banks lend to those w/lemonade stands again?
Will we have discovered some natural resource that everyone in the world wants?
Will we have another sector boom that causes economic expansion along the lines of dot-com and housing?

Submitted by an on June 22, 2009 - 10:25am.

jpinpb wrote:
LOL. I'm open to believing a V-shaped recovery if someone tells me what the impetus would be for prices to shoot up again. :)

Inflation? The Fed kept rates at 0% for quite some time now. That has to cause some kind of inflation. Just look what happened when Greenspan kept rates at 1% for awhile.

Submitted by jpinpb on June 22, 2009 - 10:40am.

But with inflation, will we have income inflation?

Submitted by Rich Toscano on June 22, 2009 - 10:42am.

jpinpb wrote:
LOL. I'm open to believing a V-shaped recovery if someone tells me what the impetus would be for prices to shoot up again. :)

Will we all of a sudden have manufacturing again?
Will so many jobs be created and will also cause incomes to double?
Will banks lend to those w/lemonade stands again?
Will we have discovered some natural resource that everyone in the world wants?
Will we have another sector boom that causes economic expansion along the lines of dot-com and housing?

All that stuff happened last time around even though we were already hugely in debt, had hollowed out our manufacturing sector, etc...

I believe the post tech wreck "recovery" was superficial, and based more on stimulus and increased indebtedness than on sustainable economic growth. But it happened, and regardless of the imbalances building up beneath it, it was a recovery. Such a thing can happen again (and the ptb are moving heaven and earth to make sure it does).

Of course, it may not happen this time. But even if it doesn't -- does that mean that unemployment will peak before the downturn ends? Is that what happened in previous L-shaped recessions?

Bear in mind that my point was not that the downturn is over, but that we shouldn't look at unemployment as a sign that it will continue, because that's rarely worked in the past.

Rich

Submitted by peterb on June 22, 2009 - 10:46am.

If you can get your hands on a CA RE graph from 1960 to today, and then overlay the unemployment graph on it...it becomes very clear that unemployment over 7% keep downward pressure on CA RE prices. And even with rates above 10%. And it's also using far less forgiving unemployment stats from the pre-Clinton era.

The phrase "It's different this time" would only be accurate if you were comparing to the correct "time". If this really looks like a recession from the last 60 years, then it would be different. But not if you compared it to credit contractions of the last 200 years.

Japan has a pretty "L" shaped looking "recovery" from what I can see. Oh, but they're different. They had a "recovery" while still producing many goods that the world was buying from them.

Submitted by Rich Toscano on June 22, 2009 - 11:02am.

peterb wrote:

The phrase "It's different this time" would only be accurate if you were comparing to the correct "time". If this really looks like a recession from the last 60 years, then it would be different. But not if you compared it to credit contractions of the last 200 years.

Japan has a pretty "L" shaped looking "recovery" from what I can see. Oh, but they're different. They had a "recovery" while still producing many goods that the world was buying from them.

Still waiting for some actual data or evidence.

All I'm asking is this: if you want to argue that the pattern that has held for every single economic downturn in the past half century plus no longer applies, please bring some data to the table. This is a reasonable request.

As you note, Japan seems like a good potential source. What was the pattern of their unemployment vis-a-vis economic downturns?

Rich

Submitted by an on June 22, 2009 - 11:04am.

jpinpb wrote:
But with inflation, will we have income inflation?

Only time will tell.

Submitted by peterb on June 22, 2009 - 12:08pm.

I believe that unemployment went over 25% in the 1930's. Some guilds recorded an unemployment rate from 1873 of 4% to about 10% in 1878, I think. I have it somewhere in my records. Both were credit contraction economic events. I dont have any data on Japanese unemployment.

Submitted by Rich Toscano on June 22, 2009 - 12:22pm.

Unless we are arguing totally different points, the question is not how high unemployment got, but whether unemployment peaked before the end of the economic contraction. Any data on this?

Rich

Submitted by carlsbadworker on June 22, 2009 - 12:27pm.

Rich Toscano wrote:

As you can see from the comments below yours, some people DO dispute this. :-)

As for housing and unemployment, I think calculatedrisk just had some graphs on this last week. The net of it iirc was that home prices don't start to really bounce back til well after unemployment peaks.
Rich

Thanks, Rich. I under-estimated the urge from the fellow piggies to dispute everything.

I just followed your suggestion and took a look at the article by calculatedrisk but I am not satisfied with its conclusion. Basically, they draw their conclusions from 2 data points. And when the third data point does not meet the theory's expectation (recession in 2001), they threw that out as irrelvent.

I definitely think people are starting to see hallucinated patterns because they are so eager to find patterns in the data points. Why there're less people on sdr's side that things have become so subtle lately, therefore it is simply impossible to find patterns (unlike 2 years when the pattern is obvious to anyone with a rational mind).

Submitted by UCGal on June 22, 2009 - 1:31pm.

Rich Toscano wrote:
As you note, Japan seems like a good potential source. What was the pattern of their unemployment vis-a-vis economic downturns?

Rich


I did some digging. Japan's recession was very different than our current one - their unemployment averaged 3.6% for the entire 90's (the so called "lost decade".)
[url]http://www.vanityfair.com/online/politics/2009/02/what-was-lost-and-found-in-japans-lost-decade.html[/url]

That said - the official definition of recession as determined by the NBER includes unemployment as one of the factors. It also includes manufacturing production, GDP, etc.

I agree with what Rich said about previous recessions also including belt tightening. I'm old enough to have been in the work force during the recessions the 80's and 90's. And I remember my parents worry during the recession of the 70's.

This isn't an argument or a dispute of what Rich says- but my opinion is that there isn't an easy out of this recession. Our economy has to be downsized - which is happening. So much of the reported earnings were either based on consumption paid for by debt, or based on inflated prices of creative derivitives. The financial sector has to write down the "funny" money portion of their portfolios. House prices need to return to a sustainable level. Until the books are adjusted to reflect a less inflated valuation, we're going to continue to contract. But that's just an opinion, and I don't have facts/charts to back it up.

Submitted by socalb on June 22, 2009 - 1:45pm.

Quote:
Rich wrote:

socalb wrote:

One nit to pick: We have never experienced an L-shaped recession in modern times.

If we do experience an L-shaped recession, I am pretty confident in saying that this time will be different.

Also, keep in mind that housing prices fell for 5 years after the last recession ended corresponding with a housing bust, so recession ends are generally a poor prediction of housing prices.

I never said otherwise... my point was about economic contraction, not housing prices.

Regarding the L-shaped recession... can you point me at data showing that A) unemployment peaks before the end of the economic contraction in such cases and B) this is likely to be the first L-shaped recession in modern times?

Like I said, I'm open -- but I need evidence.

Rich

Well commented, Rich.

I don't disagree with the original assertion, only to point out we don't have an example to draw from if this is an L-shaped recession; this opinion, I draw from the latest FOMC meeting minutes.

We don't have a reliable measure of predicting future growth, but even the Federal Reserve has predicted meager growth for at least 2 years and below par for long-term forecasts. This is from the April FOMC meeting minutes:

http://www.federalreserve.gov/monetarypo...

With the strong adverse forces that have been acting on the economy likely to abate only slowly, participants generally expected a gradual recovery: All anticipated that unemployment, though declining in coming years, would remain well above its longer-run sustainable rate at the end of 2011; most indicated they expected the economy to take five or six years to converge to a longer-run path characterized by a sustainable rate of output growth and by rates of unemployment and inflation consistent with the Federal Reserve's dual objectives, but several said full convergence would take longer. Participants projected very low inflation this year; most expected inflation to edge up over the next few years toward the rate they consider consistent with the dual objectives. Most participants--though fewer than in January--viewed the risks to the growth outlook as skewed to the downside. Most participants saw the risks to the inflation outlook as balanced; fewer than in January viewed those risks as tilted to the downside. With few exceptions, participants judged that their projections for economic activity and inflation remained subject to a degree of uncertainty exceeding historical norms.

I looked back, and this is the lowest projections that I could find coming out of a recession that the FOMC has ever issued (perhaps you can find more information through some archive).

With some grain of salt, I consider the FOMC to be somewhat optimistic with their projections as has been proven for the past 6 years.

If they are right, we are more than likely seeing an L-shaped recession, with outlook growth slower than we have seen at least in the recessions since 1980.

In my opinion, we are very unlikely to see a strong recovery since household and government balance sheets hold large liabilities in proportion to their assets. Increased savings (which we are now seeing strongly rebound) destroys credit and monetary multiplication. With global wage arbitrage likely to hold US wages down for the time being, I don't see an impetus for increased household spending. Indeed, I think we can all see how it can still contract further from here.

Chuck Ponzi

Submitted by Rich Toscano on June 22, 2009 - 2:17pm.

OK Chuck, I have a better idea now where you are coming from. Pretty well stated and i more or less agree.

I also agree with the theme of UCGal's post, especially the last paragraph.

However, while I do believe that there is a HUGE adjustment necessary, I'll bet it's going to be a long process puncuated by the occasional cyclical boom. And no, I don't have data for that -- just an opinion. ;-)

Rich

Submitted by peterb on June 22, 2009 - 3:25pm.

My bad. Misunderstood you.
I think it is worth noting however, that we've not gone into a recessionary period with so much public and private debt in the system. Nor have we had nearly these levels of debt defaults. Not sure how one would get to a recorvery from this economic state.

Submitted by CricketOnTheHearth on June 24, 2009 - 12:33pm.

I was pondering what effects population changes might have had on housing prices in the past three decades. I had the impression California experienced a big population spike starting in the '70's, and I was thinking the sudden bump up in demand forced the price of housing (and rents) to skyrocket.

But looking at the state gov't's population stats (http://www.ca.gov/About/Facts/Population...), that doesn't seem to be necessarily so, at least based on the percentage changes in overall state population. I'm especially looking at Spreadsheet E-7, CA population from 1900 to 2008, the "Change", "Percent" column.

In percentage changes, the '40's, 50's, and early 60's had higher growth, and migration also spiked in those years, yet anecdotally I've heard of house prices like $35,000 in San Francisco up till the '70's. There was another migration spike in the 70's and 80's, but at the same time the overall percent change in population in those years was less than it was in the go-go 40's-60's. But granted also, the state's population has doubled since 1975.

So I'm not sure how to take these particular stats. Is it because most of the population growth landed in 3 MSAs (SF, LA, and later SD), causing the space available for housing to run out? Or was the drastic increase in CA housing prices to levels well above the national average due to some other factor, such as did housing regs suddenly change in the 70's to make housing more expensive to build?

Submitted by greekfire on June 24, 2009 - 7:47pm.

Thanks for the update, Rich. I just got my ESRI ArcNews magazine this month and saw this map of percent unemployment on the front.

Percent Unemployment by County (April, 2009)

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