Each new economic update is painful these days, and today’s release of the October employment report is no exception.
The U.S. economy lost 240,000 jobs last month, the Labor Department reports. That’s not as steep as September’s 284,000 tumble, but there’s no mistaking the trend. The economy is in recession and the labor market is now Exhibit A for that view, in no uncertain terms.
No wonder, then, that the jobless rate jumped to 6.5% in October, up from 6.1% in the previous month. The unemployment rate, as a result, is now at its highest since 1994.
Unfortunately, it looks like the negative momentum has a ways to go. Even the mighty services industry is now routinely stumbling. For the second month running, services employment dropped sharply, falling more than 9% last month, which comes after a 17% decline in September. The significance of this slump can’t be underestimated, given that services jobs represent about 85% of total nonfarm payrolls.
Weighing heavily on services is the retail business, which is now knee-deep in contraction. So-called same-store sales in the retail industry plunged 0.9% last month, reportedly the steepest monthly drop in almost 40 years.
As bad as all the economic and financial news is of late, what’s most disturbing is the worry that the contraction for the general economy has only just begun. It may seem like we’ve been living with economic pain for years, but in fact the downcycle so far is measured in months, broadly speaking. If the downturn is longer than usual, which looks increasingly likely, the challenges in the months and perhaps years ahead will be bigger than we’ve been accustomed to in the past 20 years. One reason: the U.S. is entering a downturn with nearly all of its conventional monetary policy ammunition used up.
Indeed, America enters the recession with the Fed funds rate at 1% currently, down sharply from 5.25% barely more than a year ago. High interest rates didn’t trigger the recession this time around and so low interest rates won’t pull us out of one.
The excess that built up across the economy over a generation is unwinding, and the correction will be as painful as the boom was pleasurable. The government will pull out all the stops to ease the pain, as it should, but this time out there’s no sidestepping the purge.
It’s been easy to think, until recently, that the Fed could keep the growth cycle going indefinitely, as it seemed to do in recent history. After the tech bubble burst in 2000-2002, the central bank rapidly slashed interest rates in a bid to keep consumer spending from falling. The strategy worked–big time. But the obvious lesson about what was possible was misleading–big time. One could argue that a similar consumption-at-any-cost strategy has been the stock in trade for the past 20 years. But the liquidity injections have lost their power to elevate consumer sentiment.
In the long run, the economy will be stronger once the cleansing process is complete, but in the short run the pain will be considerable. The prospect of Fed funds at or near zero grows by the day. As a temporary matter, that’s fine. As the risk of deflation rises, central banks should act accordingly. The Bank of England’s huge 150-basis-point cut in rates yesterday is a sign of the times.
But no one should think there’s an easy way out via monetary policy. Even the prospect of an increasingly aggressive round of fiscal stimulus from Washington will, at best, dull the pain.
For those with a long-term view, the good news is that the opportunities will be huge–of once-in-a-lifetime proportions. Yet history suggests that only a few of us will have the discipline to partake of the prospective gains, once the time is right. Why? By the time the recovery begins in earnest, most of us will be far too numb from the months (years?) of bad news to contest the idea that bears rule the world.
As such, emotions run amuck remain the greatest threat to long-term investing success. Same as it ever was.