Friday, November 07, 2008

Economic Crisis Deepens

-Today's U.S. employment report was very bad. Although I had expected something more like 300,000 in net losses in payrolls, instead of the 240,000 now reported, it appears likely that subsequent revisions will put the final number above 300,000. After all, almost all releases for the last year or so have featured downward revisionsof previously reported job growth or upward revisions of previously reported job losses. And that certainly included this one that featured an unusually high total downward revision of the previous employment level (i.e. upward revision of net job losses) of 179,000. So, the reported level of payroll employment was in fact 419,000 lower than the level reported last month. Hours worked also fell significantly again. The only thing positive is that average hourly earnings increased, albeit only 0.2%. Given the decline in oil prices that should in fact translate into increased real hourly earnings.

The household survey basically confirmed the weak state of the job market that the payroll survey indicated with an increase in the unemployment rate from 6.1% to 6.5% and a job loss of 297,000. Given how fast the economy deteriorates, I think the unemployment rate will likely rise above 7% as early as January, and then rise to 9% or so by the end of 2009. Before the current downturn is over, a double digit (above 10%) unemployment rate is possible and even likely.

-Meanwhile, the U.S. auto industry appears to face a dimilar meltdown as the financial and construction industry. Both General Motors and Ford reported enormous losses and in the case of General Motors,they appear to face bankruptcy in the coming months unless the government bails them out.

That is something which will most likely happen, as it seems implausible that the "Joe six-packs" working in the Detroit auto industry would be denied a bailout at the same time that super-rich Wall Street bankers receive a bailout.

-But that will of course further increase the U.S. budget deficit. Given the deep economic slump, the "stimulus package" that Obama has said he will favor and the costly bailout of both Detroit and Wall Street, a trillion dollar deficit actually looks like a over optimistic at this point. The Congressional budget office today BTW reported that the October 2008 deficit will likely be $77 billion higher than the October 2007 deficit. Of that $18 billion can be attributed to the Wall Street bailout and $27 billion from calendar effects. But with the bailout being a permanent (for the rest of the budget year) factor it should not be excluded. The $27 billion in calendar effects should arguably be excluded but that still leaves us with a $50 billion underlying monthly deterioration. And as last year's deficit was $455 billion and as $50 billion deterioration in a month translates into $600 billion in a year and as the economy is likely to deteriorate further in coming months and as we are likely to see additional "stimulus packages" and bailouts, it should be obvious to anyone familiar with basic math that the annual deficit for 2009 will end up a lot higher than a trillion dollars.


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