Current economic conditions have created a fair amount of anxiety both locally and nationally. Some in the media have equated the current conditions to those of the Great Depression. While the record number of job losses, rising unemployment rates, and the crises in the financial markets all make for a very difficult 2009, it would be highly inaccurate to compare what is occurring now to what occurred during the 1930s.
One has to remember exactly how bad things were during the Great Depression to appreciate how well off most of America is today. During the Great Depression, the national unemployment rate reached nearly 25 percent. That is, nearly one in four Americans that wanted to work could not find a job. Compare that to the November 2008 jobless rate of 6.5 percent (not seasonally adjusted). In San Juan County, the November 2008 unemployment rate was 5.0 percent (not seasonally adjusted), which means that about one in twenty San Juan County residents who were in the labor force were unemployed.
With this said, there is no doubt that the economy, both nationally and locally, is sluggish. In fact, it is highly likely that the country will experience its first recession since 2001. The definition of a recession is two consecutive quarters of negative GDP growth and GDP growth in the third quarter of 2008 was negative. The best indicator of future GDP growth is consumer spending. Decreases in consumer spending result in higher inventories. As inventories increase, firms cut back production and lay off workers.
In October, consumer spending fell 1.0 percent, the largest decrease since September 2001. In light of the overall economy, it is not surprising that consumer spending is decreasing. During difficult times, many people fear losing their jobs so they start to save money in case it happens. But it is this decrease in spending which leads to higher inventories and layoffs. That is, in large part, the fear of a recession is what actually leads to the recession.
The wild card in the current economy and the main factor that will limit its ability to quickly recover is the current crises in the financial markets. The failure of several mortgage banks in the past year is nearly unprecedented. The cause of these failures is varied. The main factors include government deregulation and mismanagement within the companies themselves. Government deregulation allowed mortgage companies to make high interest rate (sub-prime) loans to borrowers who could not afford to pay off the mortgage. As long as the prices of houses were increasing, the mortgage companies could just foreclose on delinquent borrowers and resell the houses. Problems arose when the prices of houses started to fall. When this occurred, lenders began to face severe liquidity issues as they were forced to sit on an increasing amount of foreclosures. In addition, investment banks such as Lehman Brothers suffered as mortgage-backed securities, in which they were heavily invested, became more risky and worth less.
In late 2008, the federal government decided to provide $700 billion to bail out firms in the financial industry. The general idea was for the U.S. Treasury to buy up the delinquent mortgages from lenders, which would provide the liquidity needed to make loans in the future. The ability to make loans is essential to the growth of the economy. Many firms, especially smaller ones, require loans to finance expansion. Students need to borrow to continue schooling. Without the liquidity infusion provided by the bailout, the ability of banks to lend would be greatly diminished. With this said, the scope and breadth of the bailout prevents any reasonable forecast as to how long the recovery will take or even if it will work.
This past year has been difficult and it is very likely that the first half of 2009 will bring further challenges. Given the aforementioned decreases in consumer spending and the issues facing the financial markets, one can expect the economy to slow further, both locally and nationally. Most economists predict at least a one percentage point increase in the unemployment rate over the next six to nine months. In San Juan County, this would mean an unemployment rate of about six percent and imply that of the approximately 9,000 San Juan County residents in the labor force, about 540 would be unemployed.
In conclusion, it is important to remember that while times are difficult, the situation is not nearly as dire as some in the media would like us to believe. While the national unemployment rate may reach eight percent in the coming year, this would still be more than three percentage points less than it was during the deepest recession the U.S has experienced since the 1930s. In 1983, the U.S. unemployment rate reached 11.4 percent (not seasonally adjusted). Not many economists are predicting similar levels of unemployment this time around.
Joe Giannamore is the Regional Labor Economist for the Washington Workforce Development Area 3 (Whatcom, Skagit, San Juan Islands).
