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December 8, 2008
The past, the present and our perceptions were on the minds of two area economists after the release of national unemployment numbers showing rates rising to a 15-year high.
According to the U.S. Department of Labor, employers cut 533,000 jobs in November. The department’s report puts the number of unemployed persons at 10.3 million. The manufacturing sector lost 85,000 jobs and retail jobs fell by 91,000. Health care employment grew by 34,000 jobs in November.
Bill Witte, associate professor of economics at Indiana University and co-director of the Center for Econometric Model Research, says the financial turmoil of the past year has “had a psychological effect that is devastating.”
Morton Marcus, director emeritus of the Indiana Business Research Center, agrees. “People are working from their expectations rather than their experiences,” he said. Both agree that the public perception that the economy will only get worse can curtail economic activity.
“We still have 93 percent of the labor force employed, but the question is, how many people are behaving as if they were going to lose their jobs tomorrow?” Marcus asked.
On hearing such bad news, consumers may put off buying items such as cars (as evidence by recent declines in car sales) and businesses may decide to be very cautious with their money, he points out.
He says job loss numbers are out of synch with economic output data such as the gross domestic product. The rate of job loss, he said, is greater than the loss in output. In some cases, it may be that businesses are letting go of workers even though the businesses are not doing badly. “It may be that businesses know more about what’s ahead,” he said.
Unemployment rates could go as high as 8 percent, Witte said, drawing comparison to the economic recession of 1982, in which unemployment went as high as 10 percent.
That recession, unlike the multifaceted problem of today, was caused largely by rampant inflation due to high energy prices and the ensuing interest rate hike by the Federal Reserve.
Marcus says such comparisons to earlier recessions don’t work because the work force is much larger today than it was in the 1970s and 1980s.
Both economists still see an eventual, slow recovery in 2009.
“My assumption is that the next quarter is not going to be as severe as this one and that we’re going to see a flattening out of this downturn,” Marcus said.
Marcus says that some of the prerequisites for improvement are already in place: lower fuel prices, lower home prices, improved mortgage lending standards and a declining inventory of unsold homes.
Witte predicts that before things get better, “The downturn is going to be deeper than what we though a month ago.”
Both economists see some hope in President-elect Barack Obama. The proposals being put forth about investing in infrastructure “have some potential,” Witte said, but getting the financial sector back in shape will be a key element for recovery.
Marcus praises Obama’s emphasis on problem-solving, saying, “His remarks have been very responsible in trying to get people to see that, in the words of Franklin Roosevelt, ‘All we have to fear is fear itself.’”
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