The US economy is said to be beginning to recover but regular correspondent John Mauldin begs to differ.
The US unemployment rate is now officially at 9.7%. In the double-dip recession of 1980-82, unemployment rose throughout 1980 and then began to decline, before rising rapidly as the economy entered the second recession within two years to peak at 10.5% in late 1982.
So far in this recession, the US economy has shed almost eight million jobs, leaving about 15 million workers unemployed.
In addition, there are about nine million people who are working part-time because of business conditions, or those are the only jobs they could find. The average work week is at an all-time low of 33 hours.
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When the economy does begin to recover, companies are going to raise their labour input first by lifting the work week from its record low. Just to get back to the pre-recession level of 33.8 hours would be equivalent to hiring three million workers.
The record number of people working part-time against their will are going to be pushed back into full-time, which will be great news for them, but not so great news for the 125,000-150,000 new entrants into the labour market every month. Not good for them since it will be sensible for employers to hire their existing under-utilised resources first.
Also it has been estimated that there are at least four million jobs in retail, financial, construction and manufacturing jobs lost this downturn that are probably not coming back.
US population growth is adding about 1.5 million workers to the workplace every year. That means over the next five years the US is going to need 7.5 million jobs just to maintain that growth, or about 125,000 a month. (Some economists say nine million, or 150,000 per month.)
Then there are at least one million (and probably more like two million) discouraged workers who would take jobs if the economy got better.
If you adjust for inflation, average weekly earnings are about what they were in 1980 — i.e. workers are making roughly what they did a generation ago.
Mauldin calculates that the US economy needs to produce at least 15 million new jobs to get back to a 5% rate of unemployment by 2014. This calculation does not allow for an increase from the current record low average hours worked, nor, one assumes, does it allow for an increase in real wages.
The good news is that the US downturn is in the process of bottoming, though jobs are still falling. It will find that new level of spending and economic activity and grow from there. But it is going to be a while before we get back to full employment. While the numbers may say recovery, it is not going to feel like one.
The US economy has enormous excess capacity — capacity utilisation is about 68%. Banks are cutting back on their loans, and consumers and businesses are borrowing less — deleveraging fast. Housing is likely to be in the doldrums for at least two years.
Mauldin concludes: “All of this is very deflationary. Will the Fed print enough money to reflate the economy? You better hope so. Will we have to deal with it later? Of course. We have no good choices. We are in for a long five years, at the least. Yes, there will be opportunities, and new industries will be created. But it won’t happen overnight.”
No doubt there is a similar story to be told about Europe, Japan and even China. Even in Australia’s “miracle economy”, where unemployed and underemployed workers are more than 14% of the labour force.
One can see why Ken Henry does not want to withdraw stimulus yet, and why the Reserve Bank may decide not to hike interest rates just yet. (But read Glenn Stevens’ views, interpreted by most as “rate hikes soon”).
And for most other politicians and policy advisers in the newly influential G20, the dilemmas are far greater — nearer the US than Australia.