US non-farm payroll employment fell 651,000 in February as compared with falls of 655,000 in January and 681,000 in December. The decline in non-farm payroll employment and the rise in unemployment rate from 7.6% to 8.1% last month is nasty, but the rate of job loss has stopped accelerating.
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The Obama administration’s stimulus package should provide a short-term economic boost soon, so a bottom to the economic downturn may be approaching. But that doesn’t mean an upturn follows quickly—sorting out the budget deficit and inflation will come later.
Upward revisions in job loss figures for December and January mean that February’s decline was less severe than in previous months, suggesting a slight decrease in the rate of job loss. Moreover, the Institute for Supply Management’s February manufacturing and non-manufacturing indices, respectively flat and down only slightly compared with January, also suggest that the pace of economic decline may be slowing. That doesn’t suggest the economic bottom is imminent, but it does lessen for the moment fears of accelerating decline on the trajectory of 1929-32.
Whatever its long-term effects, the US economic stimulus should produce some bounce in the second quarter as modest tax cuts flow into low- and middle-income wage packets and public sector hiring creates jobs. There is thus some possibility of a bottoming out of economic activity by mid-year. Whether or not that occurs, a slowing of job losses would help boost confidence in the consumer and small business sectors, further lessening the chance of the decline becoming self-reinforcing.
The prospects for a rapid return to economic growth are less reassuring. Labour productivity, which declined by 0.4% in the fourth quarter last year, is likely to remain weak, with tight credit conditions correcting the excessive capital investment of the bubble period. Consumption will probably remain subdued in spite of extensive government attempts to revive it, as savings rates return towards or even rise above their long-term average of around 8%.
Excessive budget deficits and the possibility of resurgent inflation caused by over-stimulative monetary policy may well raise interest rates considerably, further holding back recovery. That could result in an L-shaped recession, with no real recovery for several years. But even that would be better than a seemingly bottomless economic pit.