RAY SUAREZ: Today’s news of continuing job losses follows other signs of bleeding in the nation’s economy. In addition to the sixth straight month of growing unemployment, oil prices kept spiking upward — trading close to $145 a barrel this week — and record gas prices were behind more bad news from Detroit.
Sales of new cars fell to a 10-year low, and General Motors stock fell below $10 a share, its lowest level in five decades. Consumer confidence dropped to its lowest point since 1980. And Wall Street’s fortunes continued spiraling down, as well, entering bear market territory.
For a closer look at all of this, we turn to Nariman Behravesh, chief economist for Global Insight, an economic consulting firm, and Jim Ellis, assisting managing editor of BusinessWeek magazine.
Nariman Behravesh, what do today’s job numbers tell you about the health of the American economy?
NARIMAN BEHRAVESH, Global Insight: Well, I think they confirm that the U.S. is in a recession, probably a mild recession. But when you get six months of job losses like this, as Jim Lehrer was saying earlier, 438,000 jobs lost since the beginning of the year, that’s a recession.
But all the indications are so far that these are fairly small numbers, historically in terms of a recession, so our view right now is that we’re likely to be looking at a fairly mild recession.
RAY SUAREZ: But this isn’t technically one, right? I don’t want to split hairs, but we haven’t had those two consecutive quarters of losses in the size of the gross domestic product, right?
NARIMAN BEHRAVESH: Well, it’s a little more complicated than that. We won’t get into the technicalities. But two negative quarters doesn’t necessarily make a recession and vice versa, in the sense that you can get a recession and not have two negative quarters.
So, again, from that perspective, you shouldn’t be just looking at the GDP numbers, which — you’re right — are still in positive territory, but look at a broader range of measures, employment, for example, income growth, industrial production. And when you look at those, I think it’s fairly clear that the economy is shrinking, basically.
RAY SUAREZ: Jim Ellis, where do those new job numbers lead you?
JIM ELLIS, BusinessWeek Magazine: The new jobs numbers basically say that the economy has a long way to go before we even start to see a turnaround. That puts the Fed in a really difficult position, because the Fed is worried about growth, but at the same time it’s also worried about inflation.
And right now, inflation is starting to show its head, and that means that the Fed’s under a lot of pressure wanting to raise interest rates, but knowing that, if it does, that that’s going to actually hurt the weakness in the economy that we’re already seeing from the jobs numbers.
Optimism for future has deflated
RAY SUAREZ: Well, Jim, earlier this year, a lot of analysts were saying that this was going to be a short and shallow downturn with much better news in the second half, and a lot of those same people are now saying the pain is going to continue well into 2009. What changed?
JIM ELLIS: Well, I think a lot of that optimism about the second half has sort of gone away because there are certain things that people never expected.
One large thing is that energy rates have gone up a lot faster than people expected and a lot farther. We would not have thought, you know, that we would be looking at $140, $145 a barrel in oil. And so that sort of put things completely on a new plane.
The other thing is that there are problems outside the U.S., where we had always thought they'd bail us out. I mean, inflation is now becoming an issue, not only in Europe, but also in Asia. That hasn't been thought of before.
And so the economies that we were counting on to continue their demand for U.S. products, and also to produce low-wage and low-price goods, like in Asia, that we could import here and maintain our standards of living, a lot of those rules are going away now.
RAY SUAREZ: Nariman Behravesh, do you agree that oil is sort of the central variable for changing the outlook for the rest of this year?
NARIMAN BEHRAVESH: I agree that, basically six months ago, nobody would have predicted that oil would be at $140 and, if we had, we would have said there would be a recession, so that's the big change.
Yes, I'm a little less worried than Jim seems to be about imported inflation. If you look at core inflation numbers in the U.S., they're still fairly contained.
If you look at wage inflation -- that's another piece of data that came out today as part of the employment report -- it's really not an issue. Wage inflation hasn't taken off as it did, let's say, in the last oil shocks in the '70s, '80s.
So I think inflation is not that big of a problem. That makes the Fed's life a little bit easier, in the sense that the underlying inflation rate doesn't look like it's taking off. So it may have a little more room to maneuver.
Oil and housing causing pain
RAY SUAREZ: Well, let's go back to oil, then, Nariman. Can you draw a line from that per-barrel price to a lot of these other numbers, plummeting consumer confidence, a big index that's down 20 percent, the Dow Jones industrials, cratering sales of automobiles?
NARIMAN BEHRAVESH: I think they're all related to the oil price story. In terms of consumers, clearly this is one more piece of bad news after the job losses, after the housing price collapse, after the stock market struggling, and so on, basically, the high gasoline prices are hurting, and hurting a lot of people, so that's a factor.
And then, in terms of the job losses, clearly a lot of industries are struggling, airlines, trucking, because of these high fuel prices, so they're shedding jobs. So it really is very pervasive throughout the economy. It's hurting; there's no way to kind of sugarcoat that pill.
RAY SUAREZ: Jim Ellis, it's easy to look back at other times in our history and find consumer confidence higher when the numbers were far more dire. Why do people feel so bad, so pessimistic, right now?
JIM ELLIS: I think one reason people feel particularly pessimistic right now is because of what they've been through over the last year. We've gone in barely a year and a half from the heights of the housing bubble, where everyone felt rich, basically, because the house they lived in was suddenly this huge sort of massive accumulation of wealth right under their feet.
And then, in less than a year -- I mean, really from last summer on to now -- we've seen a lot of people, particularly in major cities, lose huge amounts of wealth. We see foreclosure rates.
But more important than that, we understand that, in large cities, where the current sales of homes -- the current sale prices of homes are dropping up to 20 percent in places like a Phoenix, a Miami, you know, the places that really bubbled up are now being pulled out.
What that means is that the same way we had a wealth effect, where people felt very wealthy and they wanted to spend money, because their house values were going up, we're now seeing that there could be a reverse wealth effect, where people might cut back small amounts, but important amounts, when they suddenly realize that the value of their financial assets, because of the stock market coming down, and also the value of their home has dropped.
Hitting bottom before improvement
RAY SUAREZ: So, Nariman Behravesh, taking the factors that Jim Ellis sees in play, when do you know it's over? What numbers do you start looking at to see that, in fact, the housing prices are starting to bottom out, that employers are starting to hire again?
NARIMAN BEHRAVESH: Well, I think our view right now, this is going to go on for a while. And in fact, it could get a little worse before it gets better.
We don't think housing is going to hit bottom until probably early next year. And that's the point at which things will start to turn around. The drag from housing will diminish.
The problem is the U.S. has been hit with two big shocks. One is the housing subprime problem; the other is these record-high energy prices.
And it's struggling. In fact, it's almost a miracle that the economic situation isn't even worse than it is. But I think the natural resilience of this economy will come into play once housing bottoms out.
RAY SUAREZ: And will the big job losses surrounding housing -- I mean, are those people there to be called back, mortgage brokers, construction workers? Are they available when someone wants to build a house and borrow money to build it again?
NARIMAN BEHRAVESH: Oh, I assume they will be. The good news is that, even though there's a lot of job losses in those industries, there are other industries where there continue to be job creation.
Health care is an obvious example. Education is another one. Any industry that's focused on exports is doing fairly well, so it's not a uniformly bad picture, and that's part of the good news here.
Waiting for the rebound
RAY SUAREZ: Well, Jim Ellis, you've been taking us on a tour through the bad news. What will you look for to see signs of change?
JIM ELLIS: Well, the number-one sign of change will be when housing bottoms out, when sales of existing homes begin to pick up, and the pricing that you can command from those -- particularly, in big cities -- starts to change.
And when that happens, a lot of people will start demanding higher prices and the psychology that sort of cuts in that the worst is behind us. People then in the stock markets will be willing to invest more.
And right now, the stock market doesn't have any reason to invest. I mean, they look at bad numbers on the U.S. economy, bad numbers on housing, shaky situations with some foreign economies, and a weak dollar. Why invest at all now? When that gets so bad that we say, "It can't get any worse," that's when things will get better.
RAY SUAREZ: Well, the finance industry itself has been the focus of a lot of concern. Is the worst over there?
JIM ELLIS: No. Unfortunately, there's still a lot of bad assets that have to be written down, you know, still in the finance industry. I mean, a lot of common sense got thrown to the wayside during the credit bubble.
And, basically, everyone was able to securitize almost any kind of debt. And they didn't really care about whether that debt could be repaid. We're now, unfortunately, suffering through the hangover from that, and probably we will do that probably until next year.
RAY SUAREZ: Jim Ellis, Nariman Behravesh, gentlemen, thank you both.
NARIMAN BEHRAVESH: Thank you.
JIM ELLIS: Thank you.