Wikinvest Wire

The economy is worse than you think?

Wednesday, July 15, 2009

Mortimer Zuckerman, chairman and editor in chief of U.S. News & World Report, comments on the prospects for an economic recovery in this WSJ op-ed piece, listing ten reasons why the labor market is worse than it appears.

- June's total assumed 185,000 people at work who probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation, e.g., finance. When the official numbers are adjusted over the next several months, June will look worse.

- More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll.

- No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey.
The notion that employment is a lagging economic indicator is being put to the test during this recession and, as Zuckerman indicates, that doesn't factor in the many nuances in the labor market, some of which have never been seen before to their current extent.

Probably the most striking of these many nuances is reason number four discussed directly below - "underemployment" - and those affected by the sharp increase in underemployment would likely disagree with this being characterized as a "nuance".
- The number of workers taking part-time jobs due to the slack economy, a kind of stealth underemployment, has doubled in this recession to about nine million, or 5.8% of the work force. Add those whose hours have been cut to those who cannot find a full-time job and the total unemployed rises to 16.5%, putting the number of involuntarily idle in the range of 25 million.

- The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity. If Americans were still clocking those extra 48 minutes a week now, the same aggregate amount of work would get done with 3.3 million fewer employees, which means that if it were not for the shorter work week the jobless rate would be 11.7%, not 9.5% (which far exceeds the 8% rate projected by the Obama administration).

- The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
There are a few more items in the list and an assessment of just how difficult the road ahead will be given all the headwinds now faced by the no longer indefatigable consumer sector.

It's hard to imagine how any sort of a sustainable recovery can be mounted this time around if it's supposed to look anything like recoveries from the last few recessions.

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Anonymous said...

Consider following two situation:

1. Small business owners (Gas stations owner, carpenters, etc.) not generating enough revenue, cannot take any salary but are still considered employed by their 'S' Corp or LLC.

2. Many temp IT workers (H1B) who were working as subcontractors now cannot find any contract work. Their employers (middle agencies) kept them on the payroll (so won't loose their status) and either run a fake payroll or show them on long vacation.

These are additional hundreds of thousand unemployed workers counted as employed.

Kenneth G. Smith II said...

If someone can pay rent, that rent can be considered part of a mortgage payment. The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future?? Here is an example of how it could work.

• Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest).
• The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700
• So the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government.
• But the government says okay, you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.

What the government has done is to provide assistance to the property owner (just like the bailout plans for the Financial Industry and Automotive Industry) and requires them to pay back the obligation starting in seven years. This is not a freebie, but short term assistance. Franklin Roosevelt called it Lend Lease.

This program is not perfect, but it can assist a lot of people who want to own homes. Most importantly, it is channeled directly to the property owner, not a large corporation that has other motives besides keeping the property owner solvent.
A significant benefit of this program is that payments to financial institutions will resume and cash flow will get back to normal levels, thus credit availability should improve.

There needs to be conditions such as confirming gross income via income tax statements; confirming employment and confirming current payroll. The only group of individuals who would be excluded are those who own more than one property (there should be no break to the investor who treated real estate as a business) and cases where mortgage fraud exists in the form of straw buyers and invalid sales (properties that sold more than three times within five years and the value change was greater than 150%).

This total assistance would be capped at $50,000 and could run for 24 to 36 months
In a given year up to $25,000 could be provided.
The government would be releasing the funds over 12 months, thus the federal outlay would be limited.
The total cost of $10 million loans receiving assistance would be $250 billion per year or $500 billion in total.
This is much cheaper than the TARP bailout and part of this can be funded with the current $70 billion in TARP repayments.
The greatest difficulty in implementing this program is processing and accounting. Loan Servicing companies would need to add staff (if one servicer can process 50 applications a week, 4,000 servicers would need to be hired, plus additional support staff) Wow, as many as 10,000 new jobs would be created. Add to this job creation the fact that several million homes do not go into foreclosure and more jobs are not lost due to desperate situations.

Yes it is possible and yes it can work.

The reason it can work is because real estate goes through cycles. If people are forced to sell at liquidation prices, everyone loses. Give property owners a chance to get back on their feet, get back to work and the whole economy starts to turn around.

As stated earlier, this is not perfect and many will complain about the injustice. But think about the injustice of the corporate bailouts, the injustice that first time home buyers get a break, the injustice that shareholders come before the individuals who created value in the companies by buying products. One can go on and on, or we can try.

We only fail if we do not try.

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