BY MATT HUTCHINS
The classic indicators of a severe downturn, rising unemployment and falling prices, are appearing across the whole economy as the contraction of credit markets extends and consumer confidence remains abysmal. On the job front, Citigroup announced this week that an additional 52,000 jobs will be cut from its payroll this year, making the total annual reduction almost 75,000 or approximately 20% of its workforce, which stood at 375,000 employees worldwide at the beginning of the year. The total job reduction in the financial sector will reach almost 160,000 overall this year, and the loss of these high paying workers will inevitably lead to cascading labor cuts in other businesses. According to the Department of Labor, unemployment currently stands at 6.5 percent and labor underutilization at 11.8 percent.
Economists are predicting that unemployment will continue to rise into 2009, and any further shocks to core industries would only serve to deepen the labor cuts that are currently expected.
Consumer prices fell the most since 1982 last month, and commodity prices dropped by the largest amount on record. Consumer goods dropped 1% as retailers and service providers seek to lure in consumers with tightening budgets, and producer prices fell as much as 2.8 percent by some estimates. The price of oil continued to decline, reaching a price below $55 per barrel, a 22-month low which is more than 60% lower than the mid-July record high of $147 per barrel. Home prices also continued to drop, falling a record 9% nationally in the third quarter. With four out of five cities in the nation reporting a fall in prices, sales volumes are being dominated by foreclosures.
Lower prices across the economy will contribute to the expectation of a continued slide in Real GDP in this quarter and the next, signaling the worst recession since the mid-1970s and the first time since World War II that the economies of the United States, Europe and Japan were all contracting. As we move forward into 2009, we will see the fall in demand currently being experienced ripple through retailers and producers, with the most likely result being that the combined weakness of all the developed nations’ economies will create compounding effects that intensify the hardship experienced around the world. Although trade-reliant businesses might have ridden out previous slow-downs by tapping foreign markets, the global crisis could create a double squeeze of falling domestic sales at home and abroad. As producers scramble to stem their losses and create adequate liquidity to ride out the crisis, more jobs will be slashed around the world and demand will be further eroded.
The U.S. Government has been pushed into a fiscal trap. According to Keynesian economics, falling prices indicate a contracting money supply, and government spending is needed to stimulate buying and keep the wheels of the economy turning. At the same time, many would argue that we spent our way into this crisis and we can’t spend our way back out. So far the economy has failed to respond as interest rates have been pushed toward zero to stimulate economic activity. The drivers of our economy have come to find that its engine has been pushed uphill too far and too fast, and in its overheated state the brake pedal is the only one that works. At this point the only fuel we have left is the strength of the dollar, and its continued potency will likely depend solely on the relative depth of the current crisis abroad.
So far, the Dollar remains strong against the Euro and the Pound, as American economic woes have been matched on the other side of the Atlantic. If the United States can continue to benefit from its central position in the world economy and enjoy relative stability as investors seek a safe haven, then the government will retain the power to spend beyond its means in order to kick-start demand. If, however, the shocks that have reverberated outward from Wall Street ultimately boomerang back into the core of global finance, the already weakened American institutions could push the national government too far.
We should all hope that the intervention by the Fed and the Treasury into the marketplace, as well as any upcoming stimulus package, will create the flexibility to bend under the ongoing pressure of this crisis. Given the precarious situation the entire world is facing, financiers and business leaders may be holding their breath in the hopes that a reversion to something like the Bretton Woods system will allow the United States to lead the way back to global economic growth. The process will be a long and painful one though, as the continued deleveraging of the financial system will likely lead to a prolonged period of stagnation and rising interest rates even after the slowdown in economic growth has passed.