This was not the cheeriest of holiday weekends. Yes, we still celebrated our Declaration of Independence from the British oppressor some 233 years ago. And yes, many towns had parades and fireworks to celebrate that event. And yes, "Big Pay Packages Return to Wall Street", headlined the Wall Street Journal. Goldman Sachs is on course to pay bonuses of $20 billion, or $700,000 per employee, twice last year's payout, and Morgan Stanley is projected to top last year's bonus pool of $262,000 per employee with checks close to $340,000.
But we fired up our barbeques only after hearing that some 457,000 non-farm payroll jobs had disappeared in June, bringing the total number of jobs lost in this recession to 6.5 million and the number of workers in search of jobs to 14.7 million. The jobless rate has risen to 9.5%, almost double the rate when the recession began to bite, and the highest in 26 years. In addition, millions of workers have accepted pay cuts and reductions in hours of work. Things are so grim in some towns -- 15 metropolitan areas have jobless rates in excess of 15%, and Detroit clocks in at 14.9% -- that their mayors diverted funds from their fireworks and parade budgets to supplement food banks and other programs to ease the plight of the unemployed.
The Obama administration's economists got it wrong. When the President was pressing for passage of his stimulus package, they predicted that it would create millions of jobs and cap the unemployment rate at around 8%. Congress gave the President the $789 billion he asked for, but the promised 2.5 million jobs have not materialized. To which the Obama team would add, "Yet". It turns out that the label "stimulus" was slapped on a grab-bag of spending projects that could not be initiated in time to affect the jobs market -- only some 15% of the stimulus money has been spent. Or it just might be that borrow-and-spend is not the route to recovery. In any event, the failure of the stimulus to work as advertised has not added to the credibility of the administration's forecast of the effect of the health care program it is trying to push through a skeptical congress, especially since soaring budget deficits now rank with health care as a major concern of voters.
The pre-holiday jobs report resulted in a spate of new forecasts. The gloomier analysts point out that consumers, who account for 70% of the economy and who have already pushed the savings rate close to 7% after years in negative territory, will be more inclined than ever to eschew that trip to the mall. Perhaps most important, lay-offs, which originally hit young workers the hardest, are now affecting what The Lindsey Group consultancy calls "breadwinners", men and women who head households.
Fear of what is to come is making even the nine-in-ten workers who have jobs cautious. Karlyn Bowman, the American Enterprise Institute's doyenne of poll analysts, tells me, "Most Americans say they are cutting back because they are worried things might get worse, not because they need to make cutbacks now."
Furthermore, many consumers can't get credit on affordable terms: in a move that gives new meaning to the term "chutzpah", Citibank, which lives on government support, raised rates on outstanding credit card balances to beat the impending government restriction on such moves. Other banks are making it more difficult for consumers to get credit, not a bad thing after the pre-recession lending surge, but a drag on the economy nevertheless.
But there is also a good deal of evidence suggesting that the worst is over. Start with the housing market. Pending home sales are up, and the 0.6% decline in average prices in April was far less than the 2.2% drop in the previous month. Thirteen of the twenty metropolitan areas covered by the Standard & Poor/Case-Shiller index recorded increases. There is little doubt that foreclosures and subsequent sales at distress prices will continue to depress the market, but homebuilders are starting to see a pick-up in traffic in response to their own price cuts and still-attractive mortgage rates.
