October 2008: Stock markets collapse. A business that has some cash decides to sit tight because a stock market panic usually ends up correcting itself.
November 2008: Stock markets collapse some more. Our example business holds onto its work force because (1) there might be some end-of-quarter orders, (2) the Obama Administration might have some great ideas, and (3) we don’t know how long this slow period will last.
December 2008: You don’t want to lay people off at Christmas. Obama has recruited some good people.
January 2009: Unemployment and GDP numbers are in. Things look terrible.
February 2009: The Obama Administration policies have been announced and they aren’t going to do anything to make the U.S. a better place to do business. S&P 500 below 800 and seemingly stuck there or below. That’s back to early 1997 levels. Cash is running low. Maybe it is time to return the company’s expenses to early 1997 levels.
Does this scenario make sense? A lot of businesses and individuals are slow to react to change. They certainly wouldn’t want to fire well-trained people hastily. We’ve been through about 4.5 months of steady downturn. That seems like the right amount of time for a business manager to say “This depression is going to be enduring. How many jobs do we need to cut?” The Federal Reserve governors just this week revised their forecast for the coming years to predict a much deeper and longer downturn. If it took the experts at the Fed 4.5 months to figure out that our trajectory was negative, you’d expect the average business manager to take at least that long.
What does that mean as a practical matter? We’ve not yet begun to see layoffs. So far only the weakest companies have fired workers. In the coming 6 months, big companies will finally try to adjust to the changed economic reality.
What do readers think of this theory? Are the job losses of the next 6 months likely to be worse than those of the preceding 6?
[On the topic of companies adjusting, my friend Max pointed out that the dinosaurs were doing great as long as there was a lot of food. “They just ate and ate and ate. If a mammal came near them they would step on him. When the climate changed and there wasn’t as much food, the dinosaurs said ‘We need to downsize now.’ The Fortune 500 are going to be about as successful in downsizing as those dinosaurs were.”]
Yes, it will get worse. Not to forget that the government is actually competing with businesses, at least indirectly. How is someone who owns a business going to be able to compete with an entity that can print cash and bills at will to create jobs? The government is basically deciding what industries and where people will be working. That to me is scary since the government is too big to make right decisions in this area. It would eventually take people away from jobs that were probably going to be sustainable on the long run.
Sounds about right. Eyeballing the shape of cumulative job loss curves:
http://freegovinfo.info/node/2425
it looks like we’re roughly half way to the bottom which won’t hit for a year or so.
Dinosaurs actually succeeded in downsizing. They’re now called “birds”…
From the looks of our last campus career fair it appears I shouldn’t be in too big a hurry to graduate- people shouldn’t look so glum at fairs…
Thoroughly enjoyed Collaborative Decision-Making Software by the way.
>>Not to forget that the government is actually competing with businesses, at least indirectly
Which businesses are they competing with?
I can see where some businesses are getting an advantage because they are getting $$ from the government, but in those cases it is one business getting an advantage over another.
Dave,
They are competing for talent. Why would someone who is extremely good at what they are doing now work businesses that are not supported by the government when can they switch to other areas where money flows in from the government? How would I as a business owner be able to convince that person to work for me?
Well, I happen to have a theory too. But my one is different from the others. That may be good, or may be because I’m just stupid. My idea is that this economic crisis shouldn’t be lasting this long. Let me explain with an analogy: just like we had a few bubbles and crashes in recent history in several stock markets around the world, we could be having an opposing effect: some kind of ‘negative’ bubble. My logic is: if you look at things like our production, our overall scientific and economic development, etc, you’ll notice it’s obviously not at the same condition as, for example, as we were in 1997 (globally). No, i dont think it’s that simple, but this is a picture: 95% of the crisis is happening because of some generalized loss of confidence of the main ‘motor’ of economy. This confidence inadvertently jump into the ‘real’ economy and started massive layoffs, loss of production, loss of consume, and a gigantic chain of crisis.
(continues)…. the thing is: if I happen to be right, solving the crisis the way we are doing is not gonna work. If we will go through an indefinite period of crisis, some change more substantial than what is being none (actually nothing’s changed so far in our economic structure really significantly since… the 60’s?) will be needed. This crisis may cause a loss of capital (money will simply disappear, and we will be in the ‘bottom of the well’, if you understand the analogy) which cannot be recovered. OR, eventually, some 10 years after the crisis like happened in ’29, we would still be catching our breath. One solution would be closing the overall capitalism and switching to communism. But none would want that, and communism already has failed(, and now I’m just being stupid), so we need another radical solution: something like freezing markets, causing big inflation, and just overstimulate the economy. Let people buy, let industries sell – because the problem isn’t lack of resources, cap of production or will to consume, it’s just an economic problem. So if we just start doing what we we’re normally, we will recover.
Well, I just know that, whatever we do, it’s going to need substantial rewriting of the globaleconomic capitalistic system.
It will get worse. Although, some will believe it to be never ending just as they thought the bubble(s) would be never ending.
Ever read The Black Swan?
These things have to work themselves out on their own. The systems are just too complex with many variables.
I’ve never met anyone who knows the future, so I doubt there is anyone who can provide a correction other than in an unanticipated and possibly negative way. This includes government or private industry.
The stock market crashed in 1929, but the Depression wasn’t in full swing until 1932.
Christmas 2010 ain’t gonna be a happy one.
The largest group of freshly unemployed I am seeing at my work (healthcare) are construction workers and law enforcement. Locally our sheriff is under investigation for the odd ratio of laid off beat cops to administrators still gainfully employed. Wilmington Ohio received ONE MILLION pounds of food today to feed the folks left after DHL pulled out. The largest humanitarian aid drop I am aware of in the US since Katrina.
Coming from the Netherlands, working as free lance consultant for ING (20.000 employees over here), I find two things surprising:
1. Our government only recently fully acknowledged the crisis we’re in. We’ve been told since September 2008 that thing weren’t that bad. They were either lying or totally ignorant. Given the US situation (going down) it isn’t hard to predict that Europe (and especially the Netherlands with its open economy) in a global economy will be struck hard. So we’ve only just started with figuring out what to do (if anything).
2. As ING has argeements with unions, in 2009 the salaries will go up 2% and there will be a one-off “bonus” of 3.800 Euro’s. The company that has received government support twice, is prepared to pay 100 Million Euro’s in benefits. The bank is on the verge of being nationalised, inflation is about 1% but employees have more money to spend in 2009 than they had in 2008. That sounds like a dinosaur.
And yes, I expect more job losses in the US and also in the Netherlands. The good thing about the Netherlands is that we (consumers) have about 250 Billion Euro’s in savings instead of big credit card debts. And though we have problems with our pensions, there is still a considerable amount to pay current and future retirees. So there is money to spend, especially with people that have a job.
So, let’s spend!
I was taught in macroeconomic 101 that governments had figured out how to even out the dramatic swings of economic ups and downs, and that we would never have a great depression. What a joke.
I sympathize with your line of reasoning and believe job losses will indeed mount. However I do not share your pessimism. I think you fail to acknowledge the role of consumer confidence. A very important (and I believe significant) consequence of the stimulus package is that people believe the government is doing something that is going to be helpful. Obamma enjoys a huge degree of public faith which can have a self-fulfilling effect. Let’s hope the actual effects of unemployment on consumer spending are less significant than the confidence effects which are causing some people to curtail spending less and keep employees on board.
During the fall of the Soviet union doctors lawyers and scientists worked as bartenders and waiters and janitors. Now the same thing is happening in the Usa:
When Arlt applied for her job, she sent in a stripped-down résumé that hid her 20-year career at national media companies, during which she ascended to vice president of brand development at On Command Video and was making $165,000 a year. She decided in 2001 to start her own business, opening an equestrian store and founding a magazine devoted to the sport. But with the economy slowing, she was forced to shutter both businesses by last June.
After applying for more than 100 jobs, mostly director-level and above in marketing and branding, and getting just two interviews, Arlt said she realized last fall that she had to do something to “close the monthly financial hemorrhage.”
$10-$15 an hour
Her new job at HometownQuotes pays $10 to $15 an hour and has mostly entailed data entry. But even though she has parted ways with some friends because she is no longer in their social stratum, Arlt said, she was glad she was no longer sitting at home, “thinking, ‘Who have I not heard from today?’ “
It’s going to get worse.
Everybody who I know – who are for the most part middle class – are already starting to pull back on their discretionary spending. As are most businesses.
That, in combination with the job losses we already know about, is going to put a lot of pressure on secondary businesses. Are you a hotel near a convention center? Your business will be down. Do you sell computer hardware? Most people will put off any planned purchases.
The overall numbers may not be that bad because of the additional jobs added by the stimulus, but I think it’s going to get quite a bit worse.