Economic Aftershock

PAUL SOLMAN:

Just how bad were the October job numbers? Private sector payrolls down by 439,000, the largest monthly drop since Gerald Ford was President.

Included in that is factory employment, which continued to fall in October for the 15th month in a row, losing 142,000 jobs. And African-American unemployment is now 9.7 percent, up a full point from last month.

Here to help us walk through the numbers are Bill Cheney, chief economist, John Hancock Financial Services, Susan Phillips, dean of the George Washington University School of Business and Public Management.

She served on the Federal Reserve's Board of Governors from 1991 to 1998. And Jared Bernstein, senior economist at the Washington-based Economic Policy Institute. Welcome to you all.

PAUL SOLMAN:

Bill Cheney, give us a sense of just how big these numbers are and how surprised economists are by them.

BILL CHENEY, John Hancock Financial Services:

I would have to say this is a truly dismal number in any human sense. Half a million people losing their jobs is a dig deal by anybody's standards.

The comparison with the job losses that took place during Gerald Ford's presidency is probably not quite realistic since obviously the base on which that drop takes place is vastly bigger now than it was then.

It is surprising in the sense that it was certainly more than economists are expecting on average, but the reality is that a huge proportion of this is very closely tied to the events of September 11, the airlines, hotels, tourism industries, the retail sales sector, among others, and all of those things there was really no way to come up with an intelligent estimate before we got this data.

PAUL SOLMAN:

I was reading 5.2 percent, which is couple hundred thousand jobs less than were actually lost. So that's what people had been predicting. You yourself I think predicted that.

BILL CHENEY:

Right. In fact, I was on that wavelength, too, but what I'm saying is it was a pure guess given that this was a response to an event, which is completely unprecedented. The fact that, you know, as a profession, we try to forecast but forecasts are only meaningful in the context of historical pattern and this is a new pattern, we hope.

PAUL SOLMAN:

Jared Bernstein, do you agree with that? And could you tell us who is actually losing jobs by region, industry, type of person, if you would?

JARED BERNSTEIN, Economic Policy Institute:

I agree for the most part with Bill, with the exception that I would point out that the economy and the labor arch in particular, was really listing quite significantly before September 11. I think we were headed for a downturn even in the absence of the attacks, though the attacks have certainly sharpened the rate at which we are losing ground.

Typically in a downturn like this, those who are hit first are those most vulnerable to swings in the economy — minorities, you cited the sharp increase in black unemployment. Single moms trying to leave welfare for work.

Those in cyclically sensitive sectors like manufacturing – by the way — manufacturing is a great example of a sector that had been going downhill over the long-term well before September 11.

PAUL SOLMAN:

A million jobs or more in the last year.

JARED BERNSTEIN:

Last couple of years it has been heading down. But now we're also seeing very sharp job losses in the service sector. Of course services has been the big story in terms of job growth throughout this recovery. Last month we lost 111,000 jobs in services.

That's the largest monthly drop in the history of the series dating back to 1939. When job losses are that broadly spread, we've got a recession in the labor department.

PAUL SOLMAN:

Is this the famous last hired — last hired first fired cliché that we're seeing living, being played out in real life?

JARED BERNSTEIN:

It's exactly that. In this way the so-called new economy, at least from a recessionary standpoint looks very much like the old one. Those at the back of the hiring queue are those who are the first to get the pink slips.

It's particularly important to note the human cost as Bill mentioned to these workers because for the first time in decades minority workers, those at the bottom half of the income scale, folks who are non-college educated really began to see marked gains in their real incomes and wages when the unemployment rate finally fell to a full employment level last fall. That makes it all that much more urgent to get back there as soon as we can.

PAUL SOLMAN:

Dean Phillips, are these people going to find work or are they somehow now semi-permanently unemployed? I mean what is going to happen to these folks?

SUSAN PHILLIPS, George Washington University:

Well, obviously there is going to be some restructuring, and there are going to be some jobs created, perhaps in different areas, in different industries. And obviously the government is going to be spending more money in the aftermath of 9/11.

So I think that we are seeing some restructuring. I think a lot of companies that probably were doing some restructuring before September 11 are doing a lot of changeover. They're looking at their product lines; their distribution systems.

And in many cases they have people on board that are not amenable to the changed environment. So I think they're taking advantage of the opportunity to do some restructuring.

PAUL SOLMAN:

You mean they're using September 11 as a kind of cover or excuse for things that they were thinking about doing anyway but there was too much resistance within the firm? Is that what you're saying?

SUSAN PHILLIPS:

Well, I don't think in most cases– I wouldn't put it quite that harshly, but in many cases firms were making some adjustments in the kinds of products they were producing.

And in the aftermath of 9/11, clearly there is going to be some change over in the kinds of products that are produced. Certainly in the tourism industry and in the airlines, you know, they're undergoing some massive changes at this point.

PAUL SOLMAN:

So that's a notion of a really structural change that was sort of taking place and now, if I understand it correctly, is really taking place because essentially we have to re-deploy the assets that we've got given people's new needs and demands. That's a big story if that's true. Is it true?

BILL CHENEY:

I think that's part of the story, but would I like to emphasize that I think the big thing that happens in a recession is not that there are hundreds of thousands of layoffs, because if you think back through the late '90s when the economy was booming, the fact is, we kept having announcements of huge numbers of layoffs, but what the booming economy did was more than offset that.

And in fact the main phenomenon in a recession is that, is not so much that the number of displaced workers increases so much, but that they're not getting a rehire somewhere else. To some extent, companies which were, which would not otherwise have cut jobs will be doing so in the recession.

That's clearly true because they're suffering specific drops in demand for their services. But I think this restructuring is something, which has been going on for the last five years at least.

And in fact in many ways, that's how we have the boom. If you think back to all the discussions of why the economy was growing so strongly in the late '90s, all the conversation was about productivity growth. What is productivity growth? It's doing things differently with fewer people.

PAUL SOLMAN:

Well, will these people who are being laid off – I ask the question of you that I asked before — are they going to find it more difficult to get reemployed now? Are they going to be out of work longer do you suppose because, after all, there is this rush of people, all of whom are getting laid off at the same time?

BILL CHENEY:

Well, certainly right now that is exactly what's happening. I mean we are in a recession, and a large number of people are not going to find jobs right away or for a number of months. But I think it always feels the steepest decline during a recession as if this is rather the end of the world and things are changing in a fundamental sense. But the reality is that it's a cycle.

It goes down and it will be coming back up. We've got both the Federal Reserve and the federal government really pushing full steam ahead on both monetary and fiscal levels, and it's almost inconceivable that this will not produce a recovery, let's say by next spring or so, at which point we will start hiring back the first fired people, the last hired from the last cycle.

And hopefully this will move us in the right direction. Now which jobs, which people exactly, there will be a lot of suffering in the process.

PAUL SOLMAN:

Jared Bernstein, do you agree with that? Is there an inevitable good days coming inevitably? I wonder if you would also comment on whether or not there's any data on how a person who is devastated by losing a job feels when they're already feeling terrible as so many of us are in the wake of the September 11 —

JARED BERNSTEIN:

I think the notion that the economy will pick up speed by next spring is perhaps pretty optimistic, but even if that's the case, the unemployment rate will continue to rise after the economy starts growing until the economy grows fast enough to make the unemployment rate go down again, so the unemployment rate by most forecasts will go up through the middle of next year.

So I think we have to be very cognizant of the steep museum human cost involved here. But of course there is a business cycle and we'll pull out of it. I also want to say that this notion that structural change led to this downturn is, I think, perhaps more complex than you really need to explain what happened. Consumers aren't spending and investors aren't investing.

That's what's holding the economy back right now. Consumer confidence is down and that has something to do with the attacks of September 11 but the fact is that a recession has a self-reinforcing mechanism built into it. As workers lose jobs and cut back hours, their income falls. We now know that in the third quarter consumption grew at recessionary rates.

So at this point we really need to make sure, and this gets to your question, that some much needed dollars get to folks who have been unemployed, whether it will be unemployed for three, six or nine months, we really need to make sure our stimulus package includes a nice chunk of unemployment insurance dollars that get to the folks who need it.

PAUL SOLMAN:

Dean Phillips, last question: Is this a number that is likely to panic people and stop them from spending, businesses — stop businesses from investing?

SUSAN PHILLIPS:

I think obviously it is a major concern. I think the unemployment number probably is going to affect consumption perhaps more than it will on the investment side, which was already quite low. But, yes, I think it's a major concern.

We should start to see more of a turnaround into next year, but it is going to cause a fair amount of adjustment as people get replaced.

And we're actually seeing a fair number of people coming back to school. They're seeing this as an opportunity to go back and get some additional training or additional education, another degree.

So, yes, there is going to be a fair amount of pain as this process goes on, but I do think that we'll see improvement next year.

The economy is still a very resilient economy, and we are not going to lose what we saw in terms of productivity growth, but we're in a down period now, and the numbers may get worse before they get better. But they will get better.

PAUL SOLMAN:

All right. Well, let's leave it there. Thank you all very much. Appreciate it.