Breaking Views

Jobs data speaks of a bottom

The loss rate has stopped accelerating, indicating a possible turnaround, but don't look for a quick rebound.

By Martin Hutchinson, breakingviews.com

(breakingviews.com) -- The 651,000 decline in U.S. non-farm payroll employment last month is nasty, but the rate of job loss has stopped accelerating.

The Obama administration's stimulus package should provide a short-term economic boost soon, so a bottom to the economic downturn may be approaching. But that doesn't mean an upturn follows quickly - sorting out the budget deficit and inflation will come later.

Upward revisions in job loss figures for December and January mean that February's decline was less severe than in previous months, suggesting a slight decrease in the rate of job loss.

Moreover, the Institute for Supply Management's February manufacturing and non-manufacturing indexes, respectively flat and down only slightly compared with January, also suggest that the pace of economic decline may be slowing.

That doesn't suggest the economic bottom is imminent, but it does lessen for the moment fears of accelerating decline on the trajectory of 1929-32.

Whatever its long-term effects, the U.S. economic stimulus should produce some bounce in the second quarter as modest tax cuts flow into low and middle-income wage packets and public sector hiring creates jobs.

There is thus some possibility of a bottoming-out of economic activity by mid-year. Whether or not that occurs, a slowing of job losses would help boost confidence in the consumer and small business sectors, further lessening the chance of decline becoming self-reinforcing.

The prospects for a rapid return to economic growth are less reassuring. Labor productivity, which declined by 0.4% in the fourth quarter last year, is likely to remain weak, with tight credit conditions correcting the excessive capital investment of the bubble period.

Consumption will probably remain subdued in spite of extensive government attempts to revive it, as savings rates return towards or even rise above their long-term average of around 8%.

Excessive budget deficits and the possibility of resurgent inflation caused by over-stimulative monetary policy may well raise interest rates considerably, further holding back recovery.

That could result in an L-shaped recession, with no real recovery for several years. But even that would be better than a seemingly bottomless economic pit. To top of page

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