Larry Chimerine is a top-notch economist. I have the good fortune of working with him on the Investment Committee of Miller Investment Management, firm that carries the name of another, unrelated Miller. In the article below Larry worries that the labor market, usually a lagging indicator, has become a leading indicator and is sending ominous signs for the economy in the coming months. He tells the president what he might do about it.
The Missing Link: A Jobs Cut Moratorium
by Dr. Lawrence Chimerine
The Administration is now working feverishly to implement the stimulus package just enacted, and the mortgage modification program it recently announced. It is also trying to find the best way to utilize the remaining financial institution bailout money that Congress approved last autumn, and various other measures, to recapitalize the banking system and promote increased lending to consumers and businesses.
All of these programs are necessary to deal with the free-fall in economic activity which began last September, and as of now, shows no sign of ending. But they may not be sufficient unless some way is found to also deal with the very serious jobs crisis that has developed in recent months. Jobs are being lost at an extremely rapid rate across virtually every industry and geographic area. What is most disturbing about this trend is that, while the labor market has generally lagged business conditions in the past, it has now become a leading indicator of broad macroeconomic trends, and is therefore now sending ominous signs about the economy going forward.
This is occurring for three reasons. First, recent declines in jobs and in the average workweek have been so large that they are wiping out a significant amount of household purchasing power, exacerbating the already sharp downward trend in consumer spending. Second, as indicated by a recent Associated Press poll, about half of those still working are concerned that they may lose their jobs sometime soon – – this is double the already high level of a year earlier. This makes consumers more cautious about spending, driving the economy down even further. Finally, the huge layoffs recently announced by a large and growing number of companies not only are in response to business declines already experienced, but, in many cases, include job cuts based on the expectation of additional declines in orders, sales, etc. in the months ahead. Unfortunately, this has become a self fulfilling prophesy, virtually guaranteeing that the recession will deepen during the rest of this year.
It is thus clear that the labor market must be stabilized in order to break the downward economic spiral, and, along with the other programs the administration is putting in place, bring about a recovery. In order to accomplish this,the President should convene a meeting of the CEO’s of as many large companies as possible, perhaps through the auspices of the Business Roundtable, and ask them for a six month pause in implementing the job cuts they may have already announced, and in announcing any new ones. This will not only prevent what would otherwise be additional huge declines in employment, but will provide the time necessary for the Administration’s economic policies to begin to stimulate consumer spending.
While the President should invoke the national interest in making this request, it is probably also in the best interest of the companies themselves. Cutting jobs and other expenses to protect profits is self defeating when all companies are doing it at the same time- – the resulting drag on the economy, and therefore on corporate revenues, simply wipes out the impact of the reduction in costs on corporate earnings. For this reason, I believe most CEO’s would respond positively to such an appeal by President Obama, as long as they know that other companies are in the same boat.
The bottom line is that we are now experiencing a national economic crisis unlike anything that has occurred in this country since the 1930’s. What’s more, it is global in scope, so we can’t count on exports to the rest of the world to help turn this around. The Federal government, and the Federal Reserve, have already implemented unprecedented actions to deal with this crisis – – asking the corporate sector to assist in this process would not only be prudent, but is becoming more and more necessary as each day passes.
Radnor Int’l Consulting