steveb, It's my belief that you're right. We have a hollowed out shell of an economy built upon US demand for goods that we don't supply. All we do is shuffle them around. Our government is massively in the hole and digging and consumers are perhaps worse shape with negative savings and record debt levels. Corporations are overleveraged by and large.

I think a service economy might be more prone to massive contraction that one based on manufacturing & services.

We'll see. If the whole world contracts significantly it'll be interesting to witness.

Just from looking at the graphs it looks like construction would lose around 3 million jobs if it were to go back to the 1992-1993 levels. This certainly doesn't seem too extreme to me considering the magnitude of the housing bubble.

Where have all the jobs came from to make up for the ongoing loss of manufacturing jobs? Retail, services, and other stuff, mostly luxery, that people won't be able to afford as credit continues to tighten.

Also, if the rest of the world goes into recession, which appears to be the case, who's to say there couldn't be even more losses in manufacturing.

Another point that must be made, even if unemployment stays below 8%, you really have to factor in the employment participation rate, since the US now has the highest incarceration rate per capita of any country in the world, not to mention the growing number of underemployed, and those who simply aren't counted in the unemployment stats.

owl - I hope you didn't take my comment as one who 'creamed' you - I was just trying to make the point that your point has been addressed numerous times here already - I think I have been banging that drum as long as anyone.

Shnapster, i didn't take offense. You were right, it was discussed at length prior. But yes, it was you.

CR- the consensus of analysts is still at approx 7% annual eps growth yoy for 08, someone better tell the morons to wtfu.

Just for the sake of speculation, how do you guys think another war would affect things?

Obviously there are infinite possible outcomes, and I think most here are hoping that it won't be the case, but I think most can agree it's at least a possibility, and we don't want to be part of the "I never could have imagined it" crowd.

owl - as long as borrowers are clearly presented with the terms of their loans, I will be the first to defend the rights of adults to make their own financial decisions, even if there are risky choices on the menu.

gotta go. night, owl- hey, you should email me at: shnaps dot parlor at gmail dot com - I'd like to hear more of your story + what you are doing now in your post-LO dayz.

7% unemployment would be accompanied by what savings rate?

In the early 30's, the savings rate went from positive 5% to negative and then later spiked. The implication is that consumers drew down savings (spent more than they earned in aggregate), and later replenished them.

Today, consumers have meager "cash" savings and presumably a higher debt service. The economy therefore lacks a cushion that would help prevent a negative feedback loop. Should the savings rate rise during a recession, it is likely to be a severe one.

my God, this putz needs to be led to the rubber room (alrighty-then-johnny-boy, rock-on with that-there debt-pile
)-

""You're going to see a reliance on analytics," Snow said. "Getting away from some of the practices that got the finance industry in trouble, which was simply using models and not getting a deep study of credit quality of your counterparts."

CNNMoney.com: 404 Page Not Found

Dear CR,

I am wondering about your comment in this thread:

"The size of the problem (perhaps $500 billion or more in losses, and upto $6 trillion in lost household wealth) is huge, but that doesn't seem to add up to severe recession. IF the negative feedback loops start kicking in - sure, it's possible."

In Prof. Roubini's post from Feb 5th, the most interesting thing to my mind was the following:

"While on average the US and European corporations are in better shape – in terms of profitability and debt burden – than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay."

This sounds like a very likley outcome that would definitely put us in the "adverse" (positive) feedback loop. I keep reading that risks of this fat tail situation are not high, but just this CDS issue by itself seems to militate in favor of a different conclusion.

CR is also likely missing a whole lot of state and local government employees that will have to be layed off as tax income drops significantly from no mortage business income, no increase in property tax income (in fact they will have to lower property tax assements significantly), and general recessionary business fall off.

CR's recessionary view is a bit interesting on the employment front. There has been a lot of outsourcing in the past few years and, trust me, it isn't the cost savings most make it out to be. Companies can pull the plug on those projects without the negative aspects of layoffs. That, coupled with the erosion of the manufacturing sector may actually point to less job loss in the stats.

On the service side, I would think that there will be job shrinkage, but I don't think that will amount to massive numbers this time around. What I think the numbers will bear out is that people will pull back discretionary spending, especially on housing-related goods. I frankly think technology will be fine. Of course, that's my area so I'd say that, but I can tell you that here in Boston, the job market is very good and talent is tight.

What we're seeing in the financial sector is a lot of paper wealth vanishing, but it's mostly not liquid spendable wealth. Consumer spending will pull back, but corporate profits, at record levels, will pull back and money will seek the best profits from whatever sector is performing. Equities will suck, but the stock market isn't the economy.

Of course, I think we're in for total meltdown of the current financial markets, but the money will rush into whatever comes out of this. Make no mistake, people like good old Warren already have a plan...and the money to profit.

In past recessions, the issue was excess capacity. It caused the hard times to hang around a long, long time, and whacked a lot of employees.

Since the new decade, we have seen companies with JIT use a lot of overtime for peak periods. Yeah, that will hurt but:
1. we may not be throuwing as many folks completely out of work, but cutting their overtime severely.
2. Without a lot of stock on hand, the companies are going to have to fire up the production lines again, even if partial load.

The real issue is do companies get greedy like the 80s and kill local jobs while going cheap offshore labor. Then 2 years later figure out if they don't pay locals, there is nobody to buy their product. We have the next generation of greedy MBAs who are actting just like their dads.

Hopefully someone will kick them in the nads and they will get a clue.

So which CEO will be the next Henry Ford

gomer

CR -
What do those graphs look like for the service sector?
My guess is we have yet to experience a recession that has led a material contraction in the service sector. I could be wrong though. Just seems that that sector has been growing for the past 30 years even through recessions to make up for losses in manufacturing.
I think this recession may impact the service sector to a much greater degree than prior recessions as the service sector is now much more mature and possibly much more vunerable to economic contraction.
RE brokerage, mortgage, and finance are all big service industries and they will certainly feel some significant pain in the next 24 months on the job front.
Its just a guess but a chart is probably worth a thousand words.

"[W]e can’t rule out the possibility of getting into an adverse feedback loop"

HA! Like there's any chance of avoiding one.

Usually there are other parts of the economy growing sufficiently to offset the "adverse feedback" elsewhere. That's not happening this time.

Virtually all the job growth this century has been in government, REIC, finance, retail & healthcare, and all but healthcare are showing accelerating job losses. Given a bankrupt government, dead REIC, credit crunch, and a tapped out consumer, from whence is the offsetting growth supposed to come? Even dryfly's anecdotal uptick in manufacturing will only stem losses in that sector, not actually grow jobs.

Again, this is a consumer based economy, and there's little money left for consumption. Public, private & consumer debt is at record levels. There's simply no amount of debt left that'll create GDP when you reach the "Minsky Moment".

Consider this -- we'd be in a monster recession if only the savings rate were to return to historic norms -or- the feds stopped spending an extra half-trillion dollars annually.

It's all about sustainability, and we simply don't have it.

People like to point to Japan's huge government debt, but hey, that's all internally financed! We simply don't have that option; our government has to import it's juice. If the world doesn't want to play, we're toast.

Sure, we can just print up all the money we need, but then the world may just decide their goods (including, but not limited to oil) aren't worth any amount of dollars. That would be interesting.

So, does it matter if there is a recession?

Now THAT's a great point. IMO no, not if you have your priorities straight. Personally, I expect to be happy regardless of what lies ahead.

CR:
Sorry as I disagree with you in the unemployment. I think that there will be massive unemployment but just not in the US. As the US consumer and enconomy downsizes, the lower demand for goods from other countries will drive employment down in those countries. While the US employment may not show the employment losses due to outsourcing and subcontracting, the unemployment numbers will increase on a global scale. But.. another good article.

CR
Earlier, you had made mention of the winding down of defense spending in CA helping cause the 90-91 recession.
Well it has been stated that the Iraq war has been in effect an economic stimulus these six years.
So if a year from now Obama starts a quick reduction in war and its spending then what would you see as the effect on the economy. Can we afford a peace?

Dickeylee has a point, but it extends beyond construction.

You say:
During an economic slowdown, some potential workers don't seek work (whether by choice or circumstances), so the participation rate falls too. This makes forecasting the rise in unemployed workers, using a given unemployment rate, a little tricky.

But illegals are not just in construction and farmwork anymore. Where I live in California, the first layer of service layoffs (restaurants, cleaners, landscaping, warehousing, backroom retail, etc) are all undocumented and won't show in the figures. Overall there's 13 million people who could be fired without the stats moving an inch.

Memo from the Negative Feedback Loop Department

RE: Deja vu all over again?

The Ordeal of Herbert Hoover
By Richard Norton Smith and Timothy Walch
Prologue Magazine

Refusing to accept the "natural" economic cycle in which a market crash was followed by cuts in business investment, production, and wages, Hoover summoned industrialists to the White House on November 21, part of a round-robin of conferences with business, labor, and farm leaders, and secured a promise to hold the line on wages. Henry Ford even agreed to increase workers' daily pay from six to seven dollars. From the nation's utilities, Hoover won commitments of $1.8 billion in new construction and repairs for 1930. Railroad executives made a similar pledge. Organized labor agreed to withdraw its latest wage demands.

The President ordered federal departments to speed up construction projects. He contacted all forty-eight state governors to make a similar appeal for expanded public works. He went to Congress with a $160 million tax cut, coupled with a doubling of resources for public buildings and dams, highways, and harbors.

. . . Hoover's celebration of technology failed to anticipate the end of a postwar building boom, or a glut of twenty-six million new cars and other consumer goods flooding the market. Agriculture, mired in depression for much of the 1920s, was deprived of cash it needed to take part in the consumer revolution. At the same time, the average worker's wages of $1,500 a year failed to keep pace with the spectacular gains in productivity achieved since 1920. By 1929 production was outstripping demand.

The United States had too many banks, and too many of them played the stock market with depositors' funds or speculated in their own stocks. Government had yet to devise insurance for the jobless or income maintenance for the destitute. With unemployment, buying power vanished overnight. Together, government and business actually spent more in the first half of 1930 than in all of 1929. Yet such bold action did little to help the economy as frightened consumers cut back their expenditures by 10 percent and a severe drought ravaged the agricultural heartland beginning in the summer of 1930. Foreign banks went under, draining U.S. wealth and destroying world trade. Unemployment soared from five million in 1930 to more than eleven million in 1931. A sharp recession had become the Great Depression.

Cheers,
f_t_r

Ipodius,

Yes we outsourced lots of jobs, and so some companies can idle foreign factories and workers that don’t affect our unemployment. However, folks here in the U.S. have switched to other jobs (services) that will also suffer.

As burnside pointed out, lots of the service jobs we’ve created in the last decade are highly discretionary. That includes many government jobs, along with the personal trainers, massage therapists, doggy day-cares (not to mention dog-poop cleanup services) and the like.

And as a resident of the Bay Area, I fully expect to feel the effects of layoffs and business closings in foreign countries. Those are the very places that the tech companies are claiming will keep their orders coming during a downturn here.

One point, related to ones others are making, one way to interpret your last two graphs is that the US economy has changed substantially in the last 50 years, so that statistical analysis of prior recessions, particularly prior bad recessions such as 74 may not tell us all that much about the current one.

if those little wiggles in the mfg'ing employment are 'severe recessions', then what is that big dump from 2000 to now? Well, obviously the fact that as % of economy the last mfg employment drop was a smaller effect, explains why it hasn't been such a big deal. Except that, the implication is that the US ecomomy has accelerated into a new, non manufacturing based mode in the last 7 years, so... if we have a crisis in financials is that going to be a bigger deal than it was in the past when financials were a much smaller part of the economy?

If we regard the Great Depression as primarily induced by financial markets, then maybe we ought to be ocmparing to that, and looking at what percent the financial business was of the US total then vs. now.

I'm just a dumb geek, but I'm thinking it is probably more, maybe a lot more...

CR: How many workers does it take to build a House????

Not just construction workers...RE agents, Admin for RE Agency, Loan officer, Bank Admin etc........

Now what do the employment projections look like?

I'll stick to CR's statistics on MEW withdrawal and non-revolving credit for indications of how severe the recession is.

Employment/earnings aren't what fueled the expansion, so why would those statistics be the leading indicators of the downturn?

Do we really need a severe recession for things to get really bad?