Unemployment report confirms recession and further agressive Fed easing

The recession, already underway, will soon be deepening. That is the clear significance of recent economic reports, especially the jump to 5.1% in the March unemployment report from 4.8% in February and increasingly worrisome net job losses. The 232,000 first quarter decline in non-farm payrolls, which included a drop of 80,000 in March, 76,000 in February and 76,000 in January, points to an intensifying economic downdraft. The latest employment decline continued centered in goods producing industries. However, other parts of the economy are inceasingly showing weakness. Private-sector service jobs fell 5,000, with declines of 35,000 in professional services, and further employment erosion at financial firms and retailing. The areas of weakness will proliferate.

This recession has barely started. There are still finanacial assets that are difficult or virtually impossible to price or sell, except to the Fed or at deep distress prices. And it is not just financial institutions affected by the consequent credit squeeze. The loss of liquidity in the freeze of supposedly liquid auction-rate securities is just one of many problems that threatens to further deepen and broaden the recession. The recession will not be limited to the housing debacle and the immediate consquences of the financial distress and dislocations stemming from the subprime mortgage and related fiascos. Indeed, the recession has already both broadened and intensified.

The rally in equities this past week, whatever its cause, will be reversed as business earnings prove disappointing. The equity market may have mistakenly assumed that the worst for the economy was over. Also, since many expect a second half recovery and knowing the stock market typically bottoms out about half way through a recession, a beginning of the second quarter investment timing may have seemed appropriate. However, the recession is likely to be far more prolonged and deeper than widely anticipated.

The employment report will have other consequences. The Fed is now more likely to cut the Federal funds rate an additional one-half percentage point to 1.75%. That will likely further undermine the dollar. And Treasury bond yields will not only stay low but establish new cyclical lows. The Treasury maturity yield spread between the 2-and 10-year notes (1.66 on Friday, down from 1.81 on Monday) and between 10- and 30-year (0.83 on Friday) will narrow as inflation fears lighten with shrinking damands for goods, services and labor. But that process will be drawn out over time, even beyond the recession. As the Treasury maturity yield spread narrows, it will be time to look to the eventual narrowing in the quality yield spread between Treasuries and lesser grade credits. But, it is far too soon to expect that early sign of economic recovery.

The consumer, accounting for some seven out of every ten dollars of GDP, is likely to soon curtail spending. That will be a natural consequence of worsening job prospects, slowing income growth, decreasing home prices, reduced credit availability, and the heavy financial burdens imposed by high or rising energy and food costs. Given all this, it comes as no surprise that measures of consumer confidence are plunging. Furthermore, consumer bankruptcies, delinquencies and foreclosures are soaring, clear signs of mounting personal financial distress. And this distress is likely to persist despite widepread local, state and Federal efforts to deal with the housing and foreclosure crisis. Indeed, these problems are likely to worsen before they improve. One reason is the proposal to help builders and others to use current losses to gain refunds of income taxes paid in up to four previous years. Though helping the builders survive is a laudable objective, the incentive for builders to use losses to gain tax refunds will produce more homes at fire-sale prices, worsening the housing glut and further depressing home prices. The housing recession seems unlikely to hit bottom until at least spring of 2009.

Another measure of consumer distress and likely cutback in consumer spending is the rising fear of layoffs and difficulty of finding new employment. Initial claims for unemployment benefits in the latest week soared to 407,000, crossing the critical long-standing 400,000 recession-confirming level. Indeed, many analysts believe that the recession threshold for initial claims should be reduced to 375,000. That makes the latest 374,500 four-week average of initial unemployment benefit claims all the more significant. Also, the duration of unemployment is lenthening.

Philip Braverman, President
Braverman Economic consulting
One Hewitt Square #249
East Northport New York 11731