Layoffs will continue because the economy is in the process of reaching a new equilibrium based off of spending that is commensurate with income. Over the last several years, spending was greater than income due to the easy money from credit cards and home equity loans. Today the business models still reflect this old economy, and over the next twelve months, businesses will cut production to realign with the new reduced spending economy.
The first task businesses will focus on will be reducing inventory. This process of lowering inventory will lead to job losses. In addition to the job cuts from the inventory process, another wave of job cuts will occur due to the realignment of spending with income. The consumer makes up close to 70% of overall GDP, and thus, the economy will be weak for all of 2009. The fiscal stimulus plan should show positive effects later in 2009, but not enough to make up for the weak consumer. In addition to the weak consumer, the other components of GDP, investment and net exports, are still weakening. For all these reasons, the job market will be weak and job loss is inevitable.
8 comments:
I agree that with the weakened consumer it is difficult to see the economy rebounding much within the coming year. Businesses will have to realign with spending levels, especially as the personal savings rate continues to grow. The Bureau of Economic Analysis calculated that in 2005 Americans spent more than they earned; however, with a current recession and a volatile market, people are afraid to spend or invest as much, and the personal savings rate has climbed from the negatives to around 3% of disposal income. I don't see this trend reversing anytime soon and so businesses will be left with no other choice but to cut production as well as more jobs.
I think that an unemployment rate of 10% would be a very feasible scenario with the problems that we are having, namely within the retail industry and the jobs that it has been shedding left and right--well over half a million in 2008. Retail sales have fallen for six months in a row, which hasn't been seen in decades, and holiday shoppers spent even less than was forecast. The retail industry is probably not close to having bottomed out, with the International Council of Shopping Centers estimating that around 600,000 more retail jobs will be lost in 2009. The stimulus plan is a trillion dollar Christmas tree and will have minimal, if any, impact on this crucial sector in 2009.
Net exports had been looking great over the summer thanks to the weak dollar, and contributed to an impressive annualized GDP growth rate of around 2.9% for the second quarter of 2008. However, when the dollar gained purchasing power versus other currencies, especially the Euro, net exports slid and had a much weaker contribution to real GDP in the third and fourth quarters of last year. Advance data suggests that GDP in the fourth quarter of 2008 decreased at an annual rate of nearly 4%, and our economy still has more shrinking to do in 2009. That being said, the news out today about the 6.3% increase in pending home sales is positive and worth keeping an eye on, because although I don't believe we are in the right direction yet I think when the housing market is stable again then some normalcy will return to other sectors of the economy.
I agree with the idea that the business models in practice today have become outdated, since, as you mentioned, money is no longer as freely-available. However, I think it's possible that the failing business model will continue into the near future with the help of government spending. The government, with its bailouts for collapsing banks and American automakers, seems to be focused on maintaining an economic system that is no longer viable. The intention of stabilizing the economy is noble, but the government's practice of propping up failing businesses amounts to a tacit approval of these failed business practices. My prediction is that the government will keep helping businesses, and the businesses (having been given taxpayer-funded support) will have no compelling reason to change their models. I think that the economy will continue to crumble slowly until the government can no longer afford to help businesses. The businesses, left to their own devices, will probably go through a phase where many of them are acquired or simply fail. The few that survive the recession will have to adapt to the new economy.
Traditionally, as the economy struggles, layoffs occur, and I agree that the same thing is happening currently. Due to the hard economic times, companies are forced to function more efficiently. In order to do so, the companies must make cuts, and layoffs are one of the viable options. Although layoffs are not good, there are some positives from this situation. Companies who should have laid people off long ago but did not want to are now forced to, thus improving the efficiency of their company. Also, companies can begin to restructure their business models without creating a negative public image. Laying off thousands of people creates bad publicity for a company; however, mass layoffs is generally more acceptable during a recession such as this because people know that everyone is suffering and action must be taken. Microsoft recently laid off 5,000 employees, and Allstate Financial laid off 1,000. The recession helped minimize the bad publicity for such companies during layoff season, thus turning a negative into a positive.
In regards to Patrick's thoughts about the government, I do not believe that they will ever be completely incapable to helping businesses. However, I do not thing they should help business unless completely necessary to the country's economy as this will help dispose of weak companies that will not last. The stronger our businesses, the stronger our economy will be.
I agree with the businesses that layoffs are necessary (to a certian extent)for surviving this quarters nowadays. But unless they stop, and create new business practices, they aren't gonna go far. For example: you help out your best friend, who tends to gamble alot, by paying for part of his rent until he gets back on his feet. A couple of months later, you start resent ever helping him; and soon your both in the hole unless he reforms. You could be with a company for years, but at times it could only take one push to send the consumer over the edge. Consumers need more confidence, confidence that the company they're investing in will benefit them in the long run. If they only lay-off workers, instead of reforming, people are going to panic thus inducing that company's fall.
In regards to Nick's comment, I have to agree that an unemployment rate of 10% is not only feasible but likely. Not only are sectors such as retail laying off laborers, but even the tertiary sector is struggling. Services, which rely on skilled labor, are not being contacted because many previous clients cannot afford to maintain expensive business relationships. In turn, we see that prospective tertiary laborers are not being hired and expendable laborers are being released. This development, alongside the falling secondary sector of manufacturing, makes for an extremely high unemployment rate.
Even if normalcy returns to a few of the key markets, the typical consumer will perceive his net worth and ability to consume as so low that he refuses to purchase luxuries. Such sentiment will continue well past 2009 unless certain intangibles (Obama factor?) convince the average consumer that things are actually improving. Until then, retail, automotive sales, and the housing market will all flounder. Prospective buyers may need products provided for by these markets, but they will fear that things may take a sharp drop again and so will refuse to buy unless they are convinced it is safe to do so.
I believe net exports may continue to decline in the near (and perhaps distant)future. The dollar's current value is boosted by the overwhelming consumption of bonds, and this in conjunction with the Euro's decline leads to the idea that exports will continue to decrease. Additionally, many countries are adopting protectionist policies that will further reduce trade. Certain products may be unique to America, but those that are not will most likely not be purchased overseas.
I also agree that, so long as the government continues to intervene to alleviate public grievances, companies will not redevelop business models to address their inefficiencies. A truly conservative, borderline-Machiavellian government would force a new business model, but the public would be so outraged that it would be impossible to regain their support. Only an administration that would be willing to suffer a horrible reputation in the present would be able to repair things for the sake of the future.
Layoffs will continue until holiday seasons, when more people are spending which will lead to production increasing that will open up more jobs.
I think we are in a vicious cycle and unless we can get out there will be lay-offs and inventory reductions leading to more lay-offs and reduced spending. I think that with the reduced spending the US won't be able to get out of the cycle and we will have to wait until economy is somewhat stabilized.
This seems like a classic case of easy credit leading to debt and consumer fear, which then leads to reduced spending. Perhaps raising the interest rate on credit in these situations will deter the irresponsible consumers from taking it out. The spending might not be as high as it would have been had credit been easier to come by, but the repercussions would definately by much lower, leading to a more stable economy with much fewer job losses.
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