It's not really a good afternoon, is it, what with massive job losses. But I felt I had to say something to acknowledge the fact that I haven't blogged all day, having been off at a blogging workshop at Yale, and then, frantically trying to catch up. This is the glamorous blogging lifestyle, my friends: three hours away from the internet makes one feel dangerously disconnected, like the whole financial system might have collapsed without your noticing.
It didn't, quite, but the jobs numbers suggest, as Joseph Brusuelas put it, a "slow motion train wreck". Unemployment is a lagging indicator. Let's say that Ken Rogoff and Carmen Reinhart are correct in their comparison of this crisis to other developed-world financial disasters:
Let's start with the good news. Financial crises, even very deep ones, do not last forever. Really. In fact, negative growth episodes typically subside in just under two years. If one accepts the NBER's judgment that the recession began in December 2007, then the U.S. economy should stop contracting toward the end of 2009. Of course, if one dates the start of the real recession from September 2008, as many on Wall Street do, the case for an end in 2009 is less compelling.
On other fronts the news is similarly grim, although perhaps not out of bounds of market expectations. In the typical severe financial crisis, the real (inflation-adjusted) price of housing tends to decline 36%, with the duration of peak to trough lasting five to six years. Given that U.S. housing prices peaked at the end of 2005, this means that the bottom won't come before the end of 2010, with real housing prices falling perhaps another 8%-10% from current levels.
Equity prices tend to bottom out somewhat more quickly, taking only three and a half years from peak to trough -- dropping an average of 55% in real terms, a mark the S&P has already touched. However, given that most stock indices peaked only around mid-2007, equity prices could still take a couple more years for a sustained rebound, at least by historical benchmarks.
Turning to unemployment, where the new administration is concentrating its focus, pain seems likely to worsen for a minimum of two more years. Over past crises, the duration of the period of rising unemployment averaged nearly five years, with a mean increase in the unemployment rate of seven percentage points, which would bring the U.S. to double digits.
To me, the unemployment figures are the dark heart of the recession. It is not, of course, fun to lose a huge chunk of your stock portfolio and your home equity, and for a small number of people who need to monetize sizeable housing and securities assets for retirement, it is close to a catastrophe. But unemployment puts the largest number of people into the deepest trouble. Those who are overextended are forced into bankrupty; those who aren't are subject to total financial uncertainty. Moreover, it hits hardest those least able to plan for it--low skilled workers who have little margin in their budgets for savings.
We are not even close to the bottom of the job market, much less the return to the halcyon days of low single-digits. And with the contraction of the credit markets, American consumers have lost the last safety line between them and disaster.