Making Up for 2.5 Million Job Losses

Employment levels are an important factor in determining consumer spending, which, in turn, drives more than 70% of the U.S. gross domestic product. Markets today are as highly fixated on the employment numbers as they were on money supply in the early 1980s and the trade numbers in the mid-1980s.

But we think this laser-beam focus is misplaced.

In general, employment numbers are backward-looking and in many cases are actually lagging indicators of where the economy is going. If you think about it, the lagging nature of employment data makes a lot of intuitive sense. Because firing workers is so painful, managers are often reluctant to make cuts until they have to. As the economy rebounds, employers are often reluctant to rehire employees until they are absolutely sure their business has turned. Therefore it is not surprising that much of the employment data we see is either a lagging or, at best, a coincident indicator.

We also need to set the employment data in the context of what it means in dollars and cents compared with other economic factors.

First, let's look at what one job means to the economy. Simply dividing the total wages and salary number from the the Bureau of Economic Analysis personal income report by total employment, we get about $50,000 per employee. So, the loss of one job has an annual effect of approximately $50,000. This excludes a lot of things like payroll taxes and pension contributions, but those aren't immediately spendable, either.

So, for every 1 million jobs lost, we would lose about $50 billion of GDP annually. My current forecast for unemployment implies that the U.S. economy will probably lose another 2-3 million jobs from December forward, on a base of 137 million jobs. This could shave maybe $125 billion off of GDP. That sounds like a lot, and it is certainly painful for those who do lose their jobs, but from an economic perspective, it's also important to put employment in a broader context, including the factors that could offset this loss.

Below is how a loss of 2.5 million jobs compares with some other important inputs in the economy. We could undoubtedly find a lot of negative offsets, too, and not each and every one of these things will come to pass. These are not meant to be forecasts or even very exacting estimates. Rather, they are intended to identify potential opportunities that are often overlooked in the barrage of negative news.

• Gasoline prices have fallen dramatically from over $4 per gallon to less than $2 per gallon currently. These savings are real money and are relatively likely to be spent quickly. This ignores switches to more fuel efficient vehicles and the potential that U.S. drivers continue to reduce their miles driven.
   
• Thechange in real wages per hour, that is actual current dollar changes adjusted for changes in the rate of inflation, are beginning to show strong year-over-year performance improvements after several months of real dollar declines. The current dollar number has moved up some, but the big news is the rate of inflation has slowed dramatically and should continue to show decent year-over-year improvement for the next six months. Nominal dollars could show some gains but these will be more modest. How the 90-plus percentage of people with jobs get paid is very significant compared with a 1 or 2 percentage point change in the unemployment rate.
   
• The Social Security cost of living increase is particularly large this year at 5.8%, and it is not offset by the usual increase in Medicare payments. This increase will show up in the January 2009 checks. We are a little less certain if these extra funds will get spent by our senior citizens.
   
• The potential tax cut number is huge, but this represents a big political question mark. How those amounts are split between corporations and individuals is uncertain. However, given our tough short-term situation, I feel confident that there will be some type of direct stimulus to the consumer. Although infrastructure projects are sure to come, they may take too long to implement to really help the economy in the short run.
   
• Potential mortgage refinance savings could be very significant. Total residential mortgages outstanding amount to just under $11 trillion, according to the latest Federal Reserve statistics. Rates have now dropped from over 6% to less than 5% in the last year, and there is potential for the Fed to drive that number to 4.5% or less. The number we cite in the table is from a Dec. 17 Wall Street Journal editorial by Glenn Hubbard, former chairman of the Council of Economic Advisers. His estimate is based on a 4.5% rate and includes the fact that many mortgages may not get refinanced because the homeowner is in a poor financial position or because the homeowner owes more than the value of the home.

Yes, the employment numbers are an important piece of the puzzle, but not the only piece. So brace yourself for more bad news, but also keep your eye on the bigger picture.