Bubble Rubble: Why the Economy Is Stuck in Neutral
This story was revised on Monday, July 25, 2011
Repent, oh ye sinners, the economy is in purgatory -- corporate layoffs are rising faster than they have in a year. Latest evidence: Research in Motion (RIMM), makers of the increasingly out-of-touch Blackberry smartphone, said Monday it would lay off 2,000 workers.
As the WSJ reported last week:
The increase in layoffs is a key reason why the U.S. recorded an average of only 21,500 new jobs over the past two months, far below the level needed to bring down unemployment, which now stands at 9.2 percent.
The cuts also reflect the shifting outlook of employers, many of whom had expected the economy to gain speed as the year progressed. Instead, growth has faltered. If the pace continues to disappoint, more companies will feel pressure to pull back.Private-sector employers dismissed 1.6 million workers in May, with job losses ranging across industry. Layoffs among defense and aeropsace companies have tripled this year, for instance. In financial services, large players including Bank of America (BAC), Credit Suisse (CS), Goldman Sach (GS), Morgan Stanley (MS) and UBS have all reduced headcount or are planning to shrink, while experts predict that as many as 80,000 finance positions could disappear.
Perhaps even more troubling, industries that have offered some of the only bright spots on the hiring front are also showing signs of slowing down. High-tech firms continue to perform well, but that isn't stopping Cisco (CSCO) from moving to chop up to 10,000 jobs in order to cut costs. Even healthcare, an increasingly important employment sector over the last decade that now accounts for 11 percent of all U.S. jobs, is cooling off. The industry added only some 13,000 jobs last month, the slowest level of hiring since January. One hospital industry tells the WSJ:
"Every provider is trying to cut their costs as much as they can," he said.Demand vacuum
As usual, different dynamics drive the layoffs depending on the company and industry. In banking, weak lending, modest trading gains and narrowing interest income are pushing firms to shore up profits by cutting costs. At defense companies like Lockheed Martin (LMT), which this week announced it would let 6,500 people go, the trigger is expectations of slower government spending.
Such moves do have a common theme, however: Feeble demand is battering business confidence. If the economy isn't in any imminent danger of tipping back into recession, it's also showing no signs of breaking out, according to a host of economic indicators. Meanwhile, slow job growth, flat wages and declining home prices are constraining consumer spending, a huge impediment in an economy where 70 percent of activity is driven by personal consumption.
Unlike in previous recessions, when consumers began shopping again even before the downturn ended, the enormous debt accumulated during the bubble years makes that impossible this time around, notes the NYT's David Leonhardt:
There is not as much pent-up demand, because of the earlier bubble excesses. Even more important, consumers are not able to fulfill the pent-up demand they do have, because they are still paying down debts and trying to rebuild their finances.Long-term factors stifling recovery
Put another way, for years people swallowed everything the economy could produce, and more. Now we're morbidly obese. Thin is in. And really, who needs another flat-screen TV? So the economy sits idle waiting for our appetite to return.
Add in the withdrawal of government stimulus; logjam over the debt ceiling; limits of Fed monetary policy; a tax code that encourages companies to ship jobs overseas; European debt crisis; rising corporate productivity; declining power of labor; and growing concentration of wealth and you have a primo recipe for stagnation. Headwinds? Try a gale-force storm.
Note that only some of these factors are temporary. Earthquakes, real or political, pass. But Americans will be climbing out from the mountain of debt they accumulated during the bubble for years to come. Home prices have yet to bottom out. And it is far from clear that Washington has the political will, let alone the solutions, required to reverse deep-rooted problems such as growing income inequality.
Given this environment, the question isn't when companies will start hiring again -- it's why should they?
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