Companies are slashing jobs and orders at a faster pace in the U.S.

TO BE NOTED: From Bloomberg:

"U.S. Economy: Companies Cut Jobs, Durable Orders (Update2)

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By Bob Willis and Sho Chandra

Feb. 26 (Bloomberg) -- Companies are slashing jobs and orders at a faster pace in the U.S., reports today showed, signaling the economy will contract more sharply this quarter than analysts anticipated.

Orders for durable goods fell 5.2 percent in January, more than twice as much as forecast, Commerce Department figures showed in Washington. The Labor Department said 667,000 Americans filed initial applications for jobless benefits last week. Sales of new homes reached a record low in January.

“What we’re looking at in this recession overall might be the biggest slowdown in economic growth in the postwar era,” said Tim Quinlan, an economist at Wachovia Corp. in Charlotte, North Carolina.

The economy’s deterioration reflects a tightening credit crunch that the Obama administration aims to counter with as much as $750 billion in new aid to the financial industry. The U.S. is caught in a “vicious cycle” where economic and financial weaknesses are feeding on each other, White House National Economic Council Director Lawrence Summers said today.

“Our economic problems” will “not be solved in a week or month or a year,” Summers said at a conference in Arlington, Virginia. The White House today unveiled a budget outline that includes a $1.75 trillion deficit for the current financial year as officials implement the fiscal stimulus and financial-bailout programs.

Treasury Yields

Treasuries fell as investors anticipated greater issuance of government debt. Yields on benchmark 10-year notes rose to 2.99 percent at 4:08 p.m. in New York, from 2.93 percent late yesterday. The Standard & Poor’s 500 Stock Index reversed early gains to close at 752.83, down 1.6 percent.

Morgan Stanley analysts today cut their estimate for gross domestic product in the first quarter to a 6 percent decline from 5 percent previously. Deutsche Bank Securities economist Joseph LaVorgna said the slide in January to March may be closer to 10 percent, the worst since 1958.

The Commerce Department may tomorrow revise its estimate of fourth-quarter GDP to a 5.4 percent drop at an annual pace, from the 3.8 percent decline previously reported, according to the median forecast in a Bloomberg News survey.

Economists projected a 2.5 percent drop in goods orders, according to the median of 71 estimates in a Bloomberg News survey. The fall extended the string of decreases to six months, the longest stretch since records began in 1992.

Growth Impact

Demand for non-defense capital goods excluding aircraft, a proxy for future business investment, plunged 5.4 percent after falling 5.8 percent the prior month. Shipments of those items, used in calculating GDP, dropped 6.6 percent.

The auto industry has led the recession in manufacturing. General Motors Corp., which is seeking $16.6 billion in new federal loans, today reported a $30.9 billion annual loss, the second-biggest in its 100-year history. The automaker this month said it is cutting another 47,000 jobs globally this year, closing an additional five U.S. plants by 2012 and selling or shuttering its Saab, Hummer and Saturn brands as part of a restructuring campaign.

“We expect these challenging conditions will continue through 2009,” GM Chief Executive Officer Rick Wagoner said in a statement today. GM has already received $13.4 billion in federal loans since December to stay in business.

The Labor Department’s claims report showed the number of people staying on benefit rolls rose by 114,000 to a record 5.112 million in the week ended Feb. 14.

No Bottom

“The labor market weakness has not found a bottom,” said Rudy Narvas, a senior economist at 4Cast Inc. in New York. “The payrolls report for February could be really bad.”

Those figures, due from Labor next week, may show job cuts exceeded half a million for a fourth consecutive month, according to a Bloomberg survey. The unemployment rate probably climbed to 7.9 percent, the highest level since 1984.

Already, the 3.6 million jobs lost since the U.S. recession began in December 2007 mark the biggest employment slump of any economic contraction in the postwar period.

JPMorgan Chase & Co. said today it will eliminate 2,800 jobs at Washington Mutual through attrition, bringing to 12,000 the total number of positions lost since the bank purchased the failed thrift in September.

Soaring unemployment and mounting foreclosures are driving away prospective home buyers. Sales of new houses dropped 10 percent in January to an annual pace of 309,000, the lowest level since data began in 1963, Commerce also reported today. The median price decreased 13.5 percent, the most in almost four decades.

Housing Slump

Sales are falling even faster than builders can trim inventory. The number of new homes for sale at the end of the month fell 3.1 percent to 342,000. Still, at the current sales pace, it would take a record 13.3 months to eliminate supply.

“The market is still very much out of equilibrium and in fact things are getting worse,” Michelle Meyer, an economist at Barclays Capital Inc. in New York, said in an interview with Bloomberg Television. “We’re going to see further construction cuts and further declines in home prices. We haven’t seen the peak in foreclosures, which means that prices have further to fall.”

Housing and Urban Development Secretary Shaun Donovan said today 6 million families in the U.S. may face foreclosure if policy makers don’t act faster to stem the housing decline."

More and more businesses are cutting jobs in anticipation of tougher times

From Real Time Economics:

"Economists React: Jobs Report Shows ‘Slow Motion Train Wreck’

Economists and others weigh in on the January employment report, which showed a loss of nearly 600,000 jobs and a rise in the unemployment rate to 7.6%.

Another horrific report, showing job losses across the economy. Manufacturing jobs down a huge 207,000 — that’s a 1.6% drop in one month — construction down 111,000, retail down 45,000, business services down 121,000. The only private sector gain was in education and health. Household survey employment fell 1.239 million, the worst since records began in 1948. Only a dip in participation prevented an even bigger rise in the unemployment rate… If ever there were an economy in need of stimulus, this is it. –Ian Shepherdson, High Frequency Economics

There can be no sugar-coating this report. As suggested by the initial jobless claims data, the labor market remains in the grip of the worst jobs market since the 1981-82 recession, the rate of job losses massively intensified in November and there has been no change in trend since then… As for the seasonal distortion in January retail payrolls, it turns out that the retail payrolls declined despite an adjustment factor that added 687,000 to the retail employment change in January. –RDQ Economics

The January payroll report and the accompanying annual benchmark reinforced the impression of the slow motion train wreck that has become the U.S. economy… As one might expect the burden of the current increase in the rate of unemployment is disproportionately placed among young people and minorities. The unemployment rate among teenagers remained elevated at 20.8% while that among African-Americans jumped to 12.6% and Hispanics increased to 9.7%. Given the evolution of the employment data it does seem clear that the current expectation of a 9.0% rate of unemployment on the part of the Congressional Budget Office and the $43.0 billion in outlays on unemployment insurance in the stimulus, which may be voted on later today seems a bit on the optimistic side. –Joseph Brusuelas, Moody’s Economy.com

Massive hemorrhage is occurring from sea to shining sea in America and the recession is deepening. The loss of 3.6 million jobs in this recession has eliminated $360 billion in buying power in the economy. More and more businesses are cutting jobs in anticipation of tougher times. They want to trim fats and stay lean and mean for the tough times ahead. –Sung Won Sohn, Smith School of Business and Economics

Job losses are not only deepening but are becoming more broad-based, with the diffusion indexes of employment change, which show the net percentage of private sector industries adding to payrolls, at their lowest levels since the inception of the data… The reality is that, with the recession having intensified over the past few months, the credit markets still in a dysfunctional state, and business and investor confidence at rock bottom levels, even with the passage of a large fiscal stimulus package, whatever its merits may be, labor market conditions will continue to deteriorate through 2009, though the pace of decline will moderate as the year progresses, with the jobless rate likely rising into early 2010. –Richard F. Moody, Mission Residential

The employment report indicated that the labor market continues to deteriorate at a rapid clip… The latest unemployment claims data suggest that the pace of job loss may be accelerating in February. We look for the unemployment rate to continue to rise to about 9.75% by the end of 2009.–David Greenlaw, Morgan Stanley

There is no end in sight to the huge payroll declines, as high-profile lay-off announcements keep coming, and initial unemployment insurance claims have moved above 600,000 for the first time in this cycle. February might be even worse than January. We have now lost 3.6 million jobs since the cycle peak in December 2007, with 1.8 million lost in the last three months alone. We are heading for total job losses in the 6-7 million range and an unemployment rate well above 9%. –Nigel Gault, IHS Global Insight

The decline in payrolls flirted with the psychologically important 600,000 number for the third consecutive month. Based on the rising number of “real” (as opposed to liquidity-driven) bankruptcies in the retail sector, we see job losses accelerating for at least the next several months to the point where that 600,000 mark will soon be a dot in the distance behind us –Guy LeBas, Janney Montgomery Scott

Only about 12.7 million workers are employed by U.S. manufacturers, the fewest since February 1946. While this structural downtrend in manufacturing employment is likely to continue even after the recession ends, the steep job cuts accompanied by reductions in hours and overtime, indicate manufacturers are wasting no time cutting production in response to the sharp drop in total demand. That sort of adaptation makes it more likely that the overhang of inventories can be drawn down more quickly leaving the economy better poised to boost production if and when demand begins to improve. –David Resler, Nomura Securities

Compiled by Phil Izzo"

Me:

“More and more businesses are cutting jobs in anticipation of tougher times.”

This is what’s happening. Employers are cutting jobs proactively in anticipation of a deep bottom. It’s a Proactivity Run. It is evident in Fisher’s Debt-Deflation. This also explains why productivity is rising.

Since this run began in the middle of November, these figures mean that we are losing to Debt-Deflation. Since we’ve been trying to avoid this, what we’ve done hasn’t worked. Government needs to take bolder actions, including the Fed.

Comment by Don the libertarian Democrat - February 6, 2009 at 2:36 pm

productivity may be shrinking the pie in the short run by kickstarting a self-feeding spiral of job and spending cuts.

From Real Time Economics:

"Productivity Paradox Result of Freaked Out Economy

Is this another New Economy?

Overshadowed somewhat by the drumbeat of negative news on employment, output and spending was news Thursday that U.S. productivity grew 2.8% in 2008, the fastest since 2003.

That’s strong even in an expanding economy. In a severe recession it’s practically a miracle.

Every recession going back to World War II has had at least one quarter when productivity shrank. And in some cases, during severe recessions, there were a few. Except this time.

Not only has productivity in the nonfarm business sector been positive since late 2007 when the recession officially began, growth rates have been sizable, rising 3.2%, at an annual rate, during the fourth quarter even as the economy shrank 3.8%.

“We’re experiencing this paradox,” said Harvard University Professor Dale Jorgenson, an expert on productivity. The economy is in a downturn, he explained, “at the same time it’s becoming more competitive.”

A decade ago, the explanation for the productivity boom was clear: Information technology and, in particular, the manufacture of IT equipment was fueling the rise in economy-wide efficiency.

Then, following the 2001 recession, productivity leapt higher again in sort of a second New Economy. The reason didn’t seem as clear initially. But economists eventually concluded that the spreading out of IT gains to the service sector — particularly wholesale and retail trade (dubbed the Wal-Mart effect) — was one source of that second leg-up.

During the previous two episodes, productivity gains created entire new industries, millions of jobs and hundreds of billions of dollars in new wealth. They coincided with tranformational change in the economy. Employment grew, but output expanded even faster.

But this time is different. Companies may be running more efficient shops, but it’s not expanding the economic pie. In fact, productivity may be shrinking the pie in the short run by kickstarting a self-feeding spiral of job and spending cuts.

In other words, following two mild recessions by historical standards — in 1990-91 and 2001 — companies this time have essentially thrown in the towel early without waiting to gauge how the downturn unfolds, as evidenced by another climb in new jobless claims at the end of January to over 600,000 — nearly double where they were one year ago.

That’s why even though business output fell last quarter at a 27-year high, hours worked plunged the furthest since 1975.

So it’s not another New Economy. It’s more of a Freaked Out Economy.

In the short run the result is the same: productivity is bucking its once procyclical nature, which means it tended to rise during expansions and drop in recessions. One other notable exception, besides now, was the 2001 downturn.

The interplay between employment and productivity will be key in 2009. If recent productivity growth simply reflects front-loaded job cuts, then some of the old dynamic may return with employment stabilizing and productivity gains fizzling.

That may make things feel better in the short run, but the eventual recovery might not be as long-lasting as in the 1990s and 2000s, unless a new source of productivity besides nimble labor markets emerges. –Brian Blackstone"

Me:

“In fact, productivity may be shrinking the pie in the short run by kickstarting a self-feeding spiral of job and spending cuts.”

Contra Casey Mulligan, my thesis is that we have been in a Proactivity Run. In other words, employers have been proactively laying off workers ahead of the actual decrease in demand. The employers are trying, in essence, to lay off for a projected bottom before we even get there or know what it will be. For a time, productivity will rise, unlike earlier recessions.

This is an effect of the rampant fear and aversion to risk, and follows, in my opinion, from Fisher’s model. Tax cuts targeted at investment would help to attack this aversion.

Comment by Don the libertarian Democrat - February 5, 2009

it is hard to paint a very positive portrait of the labor market in the near term

From Macroblog:

"Layoffs: The new problem?

Across the United States and Europe there was a wave of layoff announcements this week, with more than 70,000 job cuts announced on Monday alone. Another 11,500 job cuts were announced on Tuesday, bringing the total to a little more than 200,000 layoffs announced during the first month of the year (announced layoffs January 2009). Also, the U.S. Bureau of Labor Statistics (BLS) reported Wednesday that job losses in December 2008 associated with mass layoff events (those that involve at least 50 initial claims for unemployment insurance) were up 55 percent versus a year earlier. During January, layoffs have spread to more industries and to companies from Microsoft to Starbucks to the world's largest manufacturer of construction equipment, Caterpillar, all of whom announced layoffs this week.

While layoffs have received quite a bit of attention, they were only part of the story of labor market problems in 2008—which makes the accelerating layoff reports especially bad news.

According to the latest data from the BLS Job Openings and Labor Turnover Survey (JOLTS), the layoff rate (as a percent of total employment) increased from 1.3 percent at the start of the recession in December 2007 to 1.6 percent in November 2008. Over the same period, the rate at which workers quit their jobs declined from 1.8 percent to 1.4 percent—likely a result of uncertain job prospects. On net, the overall rate of job separation toward the end of 2008 was similar to what it was at the beginning of the year. The total number of separations stood at about 4.3 million in November 2008, compared to 4.4 million in December 2007.

While the rate of total separations was relatively steady during 2008, a more notable change can be seen in the hiring rate (as a percent of total employment), which declined from 3.4 percent to 2.6 percent. The level of hiring is estimated to have been about 3.5 million in November 2008, compared with 4.7 million in December 2007.

The chart below highlights the rapid decline in hiring relative to layoffs.

Not only have firms been letting people go, they apparently have taken down the help wanted signs at an even faster rate. As a result, the unemployed have fewer employment options, and this development has exacerbated the duration of unemployment. From the BLS household survey, in December of 2008 the average duration of unemployment was 19.7 weeks, compared with 16.5 weeks in December of 2007. This lengthening in the duration of unemployment is also reflected in the Department of Labor weekly claims data released yesterday that showed the four-week average number of continuing claimants for unemployment insurance at 4.63 million during the week of January 16, compared to 2.65 million in mid-December 2007 (see the chart below).

Unfortunately, the growing indication is that "furlough, wage reductions, hiring freezes and shorter hours simply did not do enough" to deal with weak business conditions. Barring a pick-up in job creation—which is unlikely given the recent pattern of continuing claims for unemployment insurance—it is hard to paint a very positive portrait of the labor market in the near term.

By Menbere Shiferaw and Sandra Kollen, senior economic analysts at the Atlanta Fed"

Me:

Previewing your Comment

My own view is that, starting in late November, businesses starting shedding jobs proactively:

http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE50P5OS20090126

"It's hard to estimate when markets will bottom and then how long they'll be there," Cutler said in an interview. "The management team has been through multiple recessions, and knows you have to attack cost structure very early. If you don't attack them early, you can never get ahead of them."

Is there any way that I can gauge this thesis?

Posted by: Don the libertarian Democrat | January 31, 2009 at 10:47 PM

"The concern is they're cutting into muscle . . . and may have damaged their ability to recover when things start to happen."

From the Washington Post:

"Layoffs Cut Deeper Into Economy
As Recession Hits Most Industries, Corporate Giants Slash Jobs

By Annys Shin and Neil Irwin
Washington Post Staff Writers
Tuesday, January 27, 2009; A01

The nation's employers, including some of its largest and most sturdy, announced plans yesterday to slash more than 55,000 jobs, a staggering one-day toll that highlighted how quickly layoffs are accelerating( A PROACTIVITY RUN ) and how widely misery is spreading throughout the labor market.

The cuts extended to companies that were once considered bright spots in the U.S. economy. Construction equipment maker Caterpillar, whose business last year was bolstered by strong exports, said it would cut 20,000 jobs. Pfizer, one of the giants of a health-care sector that had until recently seemed immune from the downturn, said it would cut 8,000.

In all, 22 of the 30 companies that are part of the Dow Jones industrial average have announced job cuts since the economy took a nosedive in October. Analysts say they've been surprised by just how quickly those cuts have added up( THAT'S BECAUSE THE TOTAL IS PROACTIVE. ). The number of people receiving unemployment insurance benefits now stands at 4.6 million, the highest level since 1982.

"These are not just numbers on a page," President Obama told reporters at the White House yesterday, as he urged Congress to pass his economic stimulus package. "These are working men and women whose lives have been disrupted. We owe it to each of them, and to every single American, to act with a sense of urgency and common purpose."

The unemployment rate, at 7.2 percent nationwide as of December, has already reached 10 percent in some states, including Michigan and Rhode Island, the hardest hit. The nation has experienced the steepest rise in unemployment since the recession of the early 1980s, a recent analysis by the Economic Policy Institute found.

The job cuts announced yesterday "are the predictable consequence of a quickly unraveling economy( A PROACTIVITY RUN. ONLY THIS CAN EXPLAIN THE BREADTH OF THE CUTS. ) affecting all sectors and segments of the workforce," said Lawrence Mishel, the president of EPI. "Unfortunately, the rise in unemployment we've already had may only be halfway to where we're heading."

Construction firms, banks and automakers have been eliminating jobs for more than a year. But now positions are being cut across the economy. Those cuts signal that even financially strong companies are bracing for what they think will be( HERE'S THE EVIDENCE OF A PROACTIVITY RUN. ) a prolonged economic downturn.

Companies announcing job cuts yesterday included Sprint Nextel, the wireless provider, which cut 8,000; Home Depot, which cut 7,000; General Motors, which laid off 2,000; and Texas Instruments, which cut 3,400.

Caterpillar, viewed as a stalwart of American industry, cut more jobs than any other company yesterday. It said the economy has slowed so much in China and other once fast-growing nations that there have been fewer buyers for the company's bulldozers, graders and other heavy equipment.

At Pfizer, the announcement of job cuts came after the firm said it would acquire Wyeth. While job cuts are typical after mergers, the recession played a role as well, analysts said. Drugmakers are facing increased regulation and competition from cheaper generics. Prescription drug spending in 2007 fell to its lowest growth rate in more than 30 years, according to a study published last month by research firm IMS Health.

Sprint, the third-largest wireless provider, has announced three rounds of layoffs in the past two years as it continues to lose ground to its competitors. While analysts said the job cuts reflect problems specific to Sprint, they said the drop in consumer spending and rising unemployment has hurt the telecom industry as well. Wireless subscriber growth in the United States is slowing, said Stanford Group analyst Michael Nelson. And consumers are trading down to cheaper monthly plans and being more careful not to go over their allotted minutes.

Workers in Europe were hit by their own wave of corporate layoffs yesterday. Dutch financial firm ING said it was cutting 7,000 jobs. Steelmaker Corus said it was eliminating 3,500 jobs worldwide. Royal Philips Electronics, Europe's largest maker of televisions, said it was letting go 6,000 workers after reporting a $1.9 billion loss for the fourth quarter of 2008, its first quarterly loss in five years.

"The development of our quarterly results reflects the unprecedented speed and ferocity( FROM THE CALLING RUN ) with which the economy softened in 2008," chief executive Gerard Kleisterlee said in a statement.

John Challenger, chief executive of Challenger, Gray & Christmas, an outplacement consulting firm, called the flurry of layoff announcements "a perverse sign of the global economy."

He said he was also disturbed by signs that well-run companies that didn't overhire in good times are now being forced to trim their workforces in bad ones. Such companies "learned their lessons from the last period of expansion in '90s," he said. "The concern is they're cutting into muscle( ACCORDING TO MY VIEW, THEY ARE. PANIC. ) . . . and may have damaged their ability to recover when things start to happen( THIS IS ABSOLUTELY TRUE. THESE PANICKED LAYOFFS ARE MAKING THINGS WORSE NOW AND WILL ALSO HURT THE RECOVERY GOING FORWARD. THE RESULT OF PANIC. )."

While layoffs by big names attracted the most attention yesterday, workers at thousands of smaller firms are losing their jobs as well.

Small companies with 1 to 49 employees shed 281,000 jobs in December, according to a report released this month by payroll services firm Automatic Data Processing. Medium-size firms with 50 to 499 employees cut 321,000. Large companies with more than 499 workers lost 91,000.

Many economists had forecast that a government stimulus package would help revive the economy in the second half of the year. But as the recession deepens, some wonder whether its impact will be felt as early as they had expected.

"If the stimulus gets out there, that's a chunk of money that will probably help stimulate the economy, but we're not as sure of it as we were a few months ago. Things fell apart in the fourth quarter much faster than I've ever seen it happen before," said David Wyss, chief economist for Standard & Poor's.

For the next six months, many economists do not expect the pace of layoff announcements to let up much.

"There is nothing in the economic tea leaves that suggest someone is going to be hiring. This is a broad-based economic slump. From pharma to industrial to housing to telecommunications, every aspect of this economy is in a free-fall," said Richard Yamarone, director of economic research for Argus Research in New York. "There is no safe haven."( THIS IS EVIDENCE OF A RUN AND PANIC. WHEN IT SUBSIDES, THINGS WILL IMPROVE. )

Staff researcher Robert E. Thomason contributed to this report."

"it is best to cut costs and jobs as early in the downturn as possible"

More evidence of what I call a Proactivity Run. From Reuters:

NEW YORK (Reuters) - For a global industrial company facing slowing markets, shrinking developed economies, and the headwind of a rising U.S. dollar, it is best to cut costs and jobs as early in the downturn as possible( THIS IS WHAT I CALL A PROACTIVITY RUN. LAYING OFF WORKERS BEFORE YOU'VE ACTUALLY SEEN A DECREASE IN DEMAND. ), Eaton Corp (ETN.N) Chief Executive Sandy Cutler said on Monday.

Deciding where to cut, and how deeply, poses a challenge to even the most experienced management team, said Cutler, whose company has cut about 8,600 full-time jobs, or 10 percent of its work force, over the past year.

"It's hard to estimate when markets will bottom and then how long they'll be there," Cutler said in an interview. "The management team has been through multiple recessions, and knows you have to attack cost structure very early. If you don't attack them early, you can never get ahead of them."

A slowdown that initially hit the financial sector( A CALLING RUN ) has now moved to manufacturers, he said, and this is the first simultaneous, liquidity-driven ( DEBT-DEFLATION ) downturn since the Great Depression. Its speed, meanwhile, is faster than past recessions( DUE TO THE CALLING RUN. ).

"We were really trying to make these (jobs) decisions in the October time frame, and we've seen in almost every month, the outlook keeps getting darker."

Eaton, which provides detailed economic and market forecasts when it reports quarterly earnings, said Monday that economic models created after recessions in the 1990s and 2000s are "not tremendously helpful( OF COURSE NOT )."

As a result, the diversified industrial manufacturer issued a much wider-than-usual 2009 earnings forecast on Monday, estimating full-year operating profit in a range of $4.20 to $5.20 per share. In the past, the range was about 50 cents, Cutler said. Eaton said it may have to cut costs further as conditions change.

Eaton estimates U.S. gross domestic product will contract in each of the first two quarters of the 2009, on top of a steep expected contraction in the fourth quarter of 2008. The government is set to report fourth-quarter GDP data on Friday.

Separately, Cutler said the recent strength of the U.S. dollar was a key variable this year, and under current estimates, it would reduce 2009 sales by about 6 percent. The euro as well as the Brazilian and Chinese currencies, are the most important to Eaton's outlook, Cutler said.

The currency impact comes against the backdrop of shrinking U.S., European and Japanese economies, and rapidly slowing growth rates in Brazil, India and China.

"You're getting a double whammy from the change in the value of the U.S. dollar as well as this contraction," Cutler said.

Earlier, Eaton reported a lower quarterly profit, but the results beat Wall Street estimates.

(Reporting by Nick Zieminski; editing by Jeffrey Benkoe)"

As I say, more evidence of what a Proactivity Run is.

“It’s a matter of the amount of fear in corporate boardrooms as companies position themselves defensively.”

More on the Proactivity Run on Bloomberg:

"By Bob Willis and Alex Tanzi

Jan. 23 (Bloomberg) -- What’s shaping up to be the longest and deepest U.S. recession in at least a quarter century may swell the number of Americans collecting jobless benefits by half this year.

As the economic slump approaches the depths of the contraction in the early 1980s, the 4.6 million workers currently receiving unemployment insurance checks may increase to as many as 7 million by the end of 2009, economists said.

“There is no structural impediment to reaching the peaks in unemployment we saw in the early 1980s,” said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. “It’s a matter of the amount of fear( THIS IS THE KEY ) in corporate boardrooms as companies position themselves defensively( LAYING OFF WORKERS PROACTIVELY ).”

The CHART OF THE DAY shows continuing jobless claims as a percent of total non-farm payrolls. At 3.4 percent, the latest reading (red circle) is well short of the 5.2 percent peak (green circle) reached in October 1982, toward the end of the recession to which the current downturn draws the most comparisons. With 135.5 million workers now on payrolls, another 2.4 million people would need to join the ranks of those receiving benefits to make today’s figures comparable to those from 26 years ago.

The recession that began in December 2007 has so far cost 2.6 million jobs. The jobless rate will rise to 8.4 percent by the end of this year from 7.2 percent at the end of 2008, according to the median estimate of economists surveyed this month by Bloomberg News. Unemployment rose to 10.8 percent at the end of the 1982 downturn."

We're not there yet.

"scientific medication (reflation), and reflation might just as well have been applied in the first place.”

I've said that my ideas about Calling Runs and Proactivity Runs and Saving Sprees are from Irving Fisher. Months ago, I thought about posting about him, but I could not get the article onto my pc. It turns out that the St. Louis Fed doesn't let you. I'm sorry, but I'm too lazy to type it up myself. But here's a WSJ post that I remember reading:

"What’s So Bad About Deflation? Remembering Irving Fisher

Falling prices sound good to consumers struggling to buy groceries or gas, but the work of Yale University economist Irving Fisher, whose theories were formed during the Great Depression, shows the negative effects of deflation.

Fisher

The drop in consumer prices reported yesterday raised concerns about whether the nation may eventually face a deflationary environment. The figures largely showed a retreat from the high inflation of the past year, making it hardly a concern right now. But broadly falling prices would be bad news for a country up to its ears in debt. Consumers and businesses have to pay back debt with money that is worth less than the original credit, essentially increasing the debt( THE AMOUNT GOES UP IN REALITY AS THE CALLING RUN CONTINUES. ).

Fisher was an economist who lost a fortune in the stock market collapse of October 1929, after famously declaring “stock prices had reached a permanently high plateau” just the month before. When the downturn hit he turned his talent to the underlying mechanisms of the crisis.

In 1933, he wrote a paper titled the Debt-Deflation Theories of Great Depressions (reproduced by the St. Louis Fed) that feels as if it could have been written yesterday.

He outlines the problems of over-consumption, over-spending and over-indebtedness, and what their effects can be( NOTICE THE PREFIX OVER- ). He might as well be talking about the recent housing bubble when he writes: “Easy money is the great cause of over-borrowing. When an investor thinks he can make over 100% per annum by borrowing at 6%, he will be tempted( BUT ONLY THAT ) to borrow, and to invest or speculate with the borrowed money. This was a prime cause leading to the over-indebtedness of 1929. Inventions and technological improvements created wonderful investment opportunities, and so caused big debts… The public psychology( YES ) of going into debt for gain passes through several more or less distinct phases: (a) the lure of big prospective dividends or gains in income in the remote future; (b) the hope of selling at a profit, and realizing a capital gain in the immediate future; (c) the vogue of reckless( NEGLIGENT ) promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud( YES ), imposing on a public which had grown credulous and gullible”( FOR ME, A AND B ARE JUST NORMAL HUMAN DESIRES. THEY ONLY BECOME PROBLEMATIC WHEN CAUTION IS THROWN TO THE WIND. HOWEVER, GREED DOES NOT SUFFICE AS A CAUSE. PEOPLE NEED TO TELL THEMSELVES A STORY TO JUSTIFY THE RISK. IN THE CASE OF THE BANKS AND AIG AND THE BROKERS, ETC., IT WAS THE BELIEF THAT THE GOVERNMENT WOULD INTERVENE FORCEFULLY AND EFFECTIVELY IN A CRISIS. THIS IS CAUSE NUMBER 1. C AND D ARE MY CAUSE NUMBER 2 . WITHOUT C AND D, THIS CRISIS COULD NOT HAVE OCCURRED. IN OTHER WORDS, I'M SAYING THAT, AT THE VERY LEAST, THE INVESTMENT COMMUNITY ENGAGED IN NEGLIGENCE AND FIDUCIARY MISMANAGEMENT. )

Irving points to a chain of nine events that can be triggered by too much debt.

“Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both( A CALLING RUN ). Then we may deduce the following chain of consequences in nine links: (1) Debt liquidation leads to distress selling( A CALLING RUN ) and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling( YES ), causes (3) A fall in the level of prices( AS PEOPLE WILL TAKE MORE AND MORE LOSSES TO GET SOME MONEY BACK ), in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor( A PROACTIVITY RUN ). These losses, bankruptcies and unemployment, lead to (7) Pessimism and loss of confidence( FEAR AND AVERSION TO RISK ), which in turn lead to (8) Hoarding( IN CASE OF MORE CALLS ) and slowing down still more the velocity of circulation.

“The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.”( I BELIEVE THAT 7 IS THE MOST IMPORTANT, AND THAT IT PRECIPITATES 1, AND THEN JUST GETS WORSE AND WORSE. )

Sounds awfully familiar.

Summarizing his finding of the risks over too much debt and deflation, Irving writes: “(1) economic changes include steady trends and unsteady occasional disturbances which act as starters for cyclical oscillations of innumerable kinds; (2) among the many occasional disturbances, are new opportunities to invest, especially because of new inventions; (3) these, with other causes, sometimes conspire to lead to a great volume of over-indebtedness; (4) this in turn, leads to attempts to liquidate; (5) these, in turn, lead (unless counteracted by reflation) to falling prices or a swelling dollar; (6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either laissez faire (bankruptcy) or scientific medication( MY CHOICE) (reflation), and reflation might just as well have been applied in the first place( THAT'S BEEN MY POINT. OF COURSE, I ALSO RECOMMEND A TOTAL GOVERNMENT GUARANTEE AND BAGEHOT'S PRINCIPLES. )."

In hindsight, we readily see that at least one of the purported pathways to depression was never followed.

Here's something Casey Mulligan should get right, since he understands that the financial sector is not exactly wedded to the rest of the economy, but doesn't:

"October Hysteria in Hindsight

Copyright, The New York Times Company

After Lehman failed and “credit markets froze” in the second half of September 2008, many people proclaimed that a second Great Depression( I DIDN'T ) would unfold. In hindsight, we readily see that at least one of the purported pathways to depression was never followed.

During the first days of October 2008, it was claimed that businesses would not be able to borrow from banks even for basic operational expenses, such as making their payrolls. As employees had to work without pay (so the story goes), the businesses patronized by those employees would suffer, and the downward spiral would continue. Then presidential-candidate Barack Obama said that “the credit market is seized up and businesses, for instance, can't get loans to meet payroll.” It was even suggested that “recession proof” employers such as colleges and municipalities would not be able to pay their employees.

Now that a couple of months have passed, let’s look at payroll spending measured by the Bureau of Economic Analysis. The chart below shows payroll spending (measured in billions of dollars) for each of the months of second half of 2008 (December data not yet available), including contributions to pension and health funds for employees. Aggregate payroll spending was highest in August, and has remained within 0.1 percent of the August high ever since.



The Lehman Brothers investment bank failed on September 15. The bank was deeply intertwined with other financial institutions – its failure to pay its obligations put its creditors at risk – and brought the credit crisis to its crescendo. By the end of the month, the intense financial chaos motivated Mr. Obama and others to warn that banks needed lots of money from taxpayers, or else the banks’ business customers would not be able to pay their employees.

Because the bailout bill took time to pass, and then additional time for the Treasury to design and execute its $700 billion Capital Purchase Program (CPP), no bank received any money from the Treasury pursuant to the CPP until the last couple of days of October. Thus, if the warnings were right, payroll spending should have been precipitously lower in October than in the previous months. Instead, payroll spending was almost $1 billion dollars higher in October than in September – not exactly the collapse that we feared.

Some of the details of the CPP became known earlier in October. Anticipation of the CPP expenditures cannot explain why payroll spending did not collapse in October, because the purported pathway to depression was about the day-to-day cash needs of otherwise strong businesses. Even the United States Treasury admitted last week that “capital [from its CPP] needs to get into the system before it can have the desired effect.”

Even when some (but by no means all) of the CPP funds finally got “into the system” in the last days of October and the full month of November, Congress was dismayed to see that banks were not using the funds to lend. Nevertheless, payroll spending did not collapse in November, either.

It is true that payroll employment fell by about 850,000 in October and November – and that’s serious as compared to the last couple of recessions – but the payroll spending data show that the employment loss was small compared to the spending collapse forecasted in early October. The fact is that more than 136,000,000 workers received their paychecks – more than $1.3 trillion worth in October and November combined – essentially the same aggregate payroll that was paid out in the two months prior to Obama’s warning.

None of the above denies or confirms that our economy is headed for economic depression, because there are multiple pathways for getting there. Nor does it deny that the Treasury CPP might help in some way. But it does refute one of the scariest pathways to Depression – a collapse of payroll spending – that politicians from both parties alarmingly described to the American public in order to justify spending $700 billion of taxpayer funds on a bailout of United States banks."

Now, we have been dealing with two distinct events:
1) A Calling Run, followed by:
2) A Proactivity Run.

The Calling Run involved a panicked scramble to get out of declining assets and into cash, or guaranteed investments. The reason that this could effect lending was because many of the assets and investments that were being fled were loans, or other financial assets and investments held by banks. Quite naturally, if your lending practices and loans are leading you to a mad scramble to unload and untangle them, losing you an unknown sum of money, it is only natural that your lending would be curtailed. The fact that Mulligan doubts this defies belief. He only has to ask himself whether he would keep lending normally if his normal lending had led to enormous losses. Apparently he would. One explanation of the lending going on is the fact that many people had preexisting lines of credit and they accessed them. That's what these lines of credit were there for. As well, the government did intervene enough to keep some lending going on. Finally, there are small banks, for instance, who have been able to keep lending through this crisis. In any case, this run does not automatically lead to a Proactivity Run, because the financial sector is somewhat separate from the general economy. In any event, employment would certainly lag the Calling Run, at least until the extent of the Calling Run becomes clear.

In this crisis, the Proactivity Run, as opposed to simply some prudent downsizing, quite obviously began in the second half of November. It wouldn't be dramatic even here immediately, because some workers would be kept on until after the end of the holidays. By now it is obvious in both employment and consumption. In my opinion, the dithering about these bailouts, including the Automotive Bailout, have led to an Uncertainty Shock as to the level of government support. Now that the government has guaranteed more and more businesses, leading to the belief that the government will do whatever it takes to stop these runs, we are beginning to see a diminution in the fear and aversion to risk, as evidenced by the TED and VIX. My evidence for my position is the actual flow of investments.

One final thing. I don't know what is included in that compensation figure above, but, having run a business, I can tell you that if you let people off, you pay UI for them for a while. As well, if business stays higher than the employer estimates, he might have to pay more wages than he anticipates to the remaining workers. I have often found, after trimming my staff, that my payroll expenses remained the same for some time. A very annoying occurrence, but a real world one.

Finally, let me state the following: The Calling Run was not inevitable, and, even after it hit, the Proactivity Run was not inevitable. A system based on Bagehot's Principle's, I contend, would have stopped both. The handling of this crisis by the government, while better than nothing, has been a mess. That's how I see it.

Companies are cutting back so aggressively, they actually might be increasing their productivity even in the face of a wrenching economic shock.

Contra Casey Mulligan, the WSJ comes out in favor of the Productivity and Proactivity Theory of Yours Truly. In fact, I'm having a great week, as James Surowiecki and William Gross, two of my list of sages, both agreed that our Investor Class( DON'T CALL THEM FREE MARKET FANATICS) wants a Bailout Run. From Real Time Economics:

"Jobs Data’s Possible Silver Lining: Productivity

There may have been a little silver lining in the horrific December job losses reported by the Labor Department Friday. Companies are cutting back so aggressively( A PROACTIVITY RUN ), they actually might be increasing their productivity even in the face of a wrenching economic shock.( THAT'S MY THEORY )

In the final three months of 2008, employers reduced the number of hours that workers logged at a 7.7% annual rate, through a combination of layoffs and cutbacks in things like overtime and manufacturing production shifts. It was the largest quarterly contraction in hours worked since 1975, according to Macroeconomic Advisers LLC.( A PROACTIVITY RUN )

The hours worked contraction might have been greater than the contraction in overall economic output for the quarter, which will be reported later this month( THAT'S THE FIGURE THAT I'M WAITING FOR. ). In other words, businesses might have been able to squeeze more out of the workers they kept on staff, increasing business productivity, even though the economy was going through its most severe contraction in decades.( THAT'S IT. )

The government’s estimate of productivity growth — a measure of the nation’s output per hour worked by the work force — comes out in early February. Most economists focus on productivity growth among non-farm businesses — excluding agriculture, government and certain parts of housing. Macroeconomic Advisers estimates that output in the nonfarm business sector contracted at an 8.25% rate for the quarter, while hours worked during the quarter contracted at an 8.6% annual rate.

What’s so good about companies laying off workers, cutting overtime hours and eliminating production shifts, as happened during the quarter? Clearly, it means workers are suffering. But it also means the economy is adjusting to the shock of the financial crisis, and the crisis can’t end until an adjustment has taken place.( YES )

U.S. productivity trends have changed dramatically in the past decade. The U.S. experienced a productivity boom in the late 1990s and it has proven surprisingly enduring. Productivity hasn’t declined on a year-over-year basis since 1995. In the 1970s and 1980s, it experienced long contractions around recessions.

Chris Varvares, a Macroadvisers economist, says many companies entered this downturn with inventories relatively lean, meaning companies have not been caught on their heels by the collapse in consumer demand. The expanded use of temporary workers also has made it easier for business to adjust its workforce as the environment changes. Technology, the source of the 1990s boom, has made it easier to manage both inventories and employment levels.

This certainly isn’t going to make the financial crisis go away quietly. It won’t fix huge losses on dumb loans made by banks. It doesn’t solve the crisis faced by millions of Americans left without work. And its possible that even this good news could be revised away by statisticians.( TRUE )

But if it persists, it could be a source of some long-term optimism. At least here’s some evidence that the economy is making the adjustments it needs to make to eventually get back on track. In the long run, productivity is an economy’s primary driver of growth and wealth( YES. THAT'S MY THEORY. TAKE THAT CASEY. ). – Jon Hilsenrath

“Firms are continuing to react very quickly to the downturn in demand with a combination of layoffs and restricting new hires,”

From Bloomberg:

"By Bob Willis

Jan. 7 (Bloomberg) -- Companies in the U.S. eliminated an estimated 693,000 jobs in December, the most since records began in 2001, a private report based on payroll data showed.

The drop in the ADP Employer Services gauge was larger than the median estimate of economists( WHO AREN'T NOTICING THE PROACTIVITY RUN ) surveyed by Bloomberg News. Today’s report is the first to reflect methodological changes that ADP says will limit the differences between its calculations and the government’s payroll numbers.

Companies are accelerating( PROACTIVELY ) the pace of firings as the recession plaguing the world’s largest economy heads into a second year. The Labor Department may report in two days that employers slashed jobs in December for a 12th consecutive month, putting total job cuts at 2.4 million for 2008, according to a Bloomberg survey median.

“Firms are continuing to react very quickly( PROACTIVELY ) to the downturn in demand( WHICH HAS BEEN LAGGING ) with a combination of layoffs and restricting new hires,” Nigel Gault, chief U.S. economist at IHS Global Insight Inc. in Lexington, Massachusetts, said before the report. “It’s a major drag on consumer spending( TRUE ).”

Revised figures issued Dec. 18 by ADP and Macroeconomic Advisers LLC showed the discrepancies with Labor Department data narrowed considerably using the new approach. The new data put ADP’s estimate of job losses from September through November at 1.03 million, more than double its prior projection and closer to the government’s figures showing a decline of 1.29 million in private payrolls for the period.

‘Time Will Tell’

The new version “should perform better than the consensus expectation -- which generally is tough to beat,” Seamus Smyth, an economist at Goldman Sachs Group Inc., wrote in an e-mail to clients last week. “That said, the ADP report was already revised once prior to this, and that revision fit very well on historical data. But when applied in real time over the past year, performance was much worse. Time will tell whether the new construction actually leads to better forecasts.”

The ADP report was forecast to show a drop of 495,000 jobs, according to the median estimate of 24 economists in a Bloomberg News survey. Projections ranged from declines of 250,000 to 550,000.

ADP includes only private employment and does not take into account hiring by government agencies, which is included in the monthly payroll report. Macroeconomic Advisers LLC in St. Louis produces the report jointly with ADP.

15-Year High

The government may report on Jan. 9 that total payrolls fell by 500,000 last month, and the unemployment rate rose to a 15- year high of 7 percent, according to the Bloomberg survey median. The economy lost 1.9 million jobs in the first 11 months of the year.

Other labor-market reports have also shown weakness. Job cuts announced by U.S. employers rose 275 percent last month from December 2007, to 166,348, Chicago-based Challenger. Gray & Christmas Inc. said today. For all of 2008, employers announced 1.22 million job cuts, the most in five years.

Today’s ADP report showed a decrease of 220,000 jobs in goods-producing industries including manufacturers and construction companies. Service providers cut 473,000 workers. Employment in construction fell by 102,000, the 21st consecutive month of cuts in the industry.

Companies employing more than 499 workers shrank their workforce by 91,000 jobs. Medium-sized businesses, with 50 to 499 employees, were down 321,000 jobs and small companies decreased payrolls by 281,000.

Financial Services

Financial-service companies and manufacturers are leading the cutbacks. Cigna Corp., the health insurer whose shares fell 69 percent last year because of investment losses, said this week it will cut about 1,100 jobs and take a fourth-quarter after-tax charge of $30 million to $40 million for 2008.

A declining stock market and the recession have eroded the earnings outlook for Cigna, which relies on investment returns for almost two-thirds of pretax income.

“Given the unprecedented economic situation we and our customers are facing, these actions are essential( PROACTIVE ),” said Cigna Chief Executive Officer H. Edward Hanway in a Jan. 5 statement. “Decisions like these are difficult and never made lightly, but they are necessary given the current environment( PROACTIVE ).”

The ADP report is based on data from about 400,000 businesses with approximately 24 million workers on payrolls.

ADP began keeping records in January 2001 and started publishing its numbers in 2006."

This is very bad news. The need to stop this Proactivity Run is urgent. The Stimulus is largely an attempt to do that, by allowing employers to expect an injection of consumption into the economy. In other words, the stimulus acts as a government guarantee to help stop the downward spiral in consumption. This argues for the Sales Tax decrease, which will give an incentive for current consumption as opposed to deferred consumption ( saving ). Only government action can stop any run, because only it has the available resources to be believed.

"signaling businesses are cutting back on investments as the recession deepens. "

From Bloomberg, more evidence that I am correct about there being a Proactivity Run, and the increase in Productivity being a consequence of it:

"Factory Orders in the U.S. Tumble More Than Forecast (Update1)

By Timothy R. Homan

Jan. 6 (Bloomberg) -- Orders placed with U.S. factories in November fell twice as much as forecast, signaling businesses are cutting back( PROACTIVELY. IN OTHER WORDS, A PACE FASTER THAN FALLING DEMAND. ) on investments as the recession deepens.

Demand fell 4.6 percent after a revised 6 percent decrease in October that was larger than previously estimated, the Commerce Department said today in Washington. The back-to-back decline was the biggest since records began in 1992.

Companies are likely to pare spending further as access to credit dries up and global demand slows. President-elect Barack Obama has proposed a two-year economic stimulus package, costing as much as $850 billion, with an emphasis on infrastructure projects that may give manufacturing a boost.

“Consumer-durable spending is way down as credit is more difficult to get,” said Douglas Smith, chief economist for the Americas at Standard Chartered Bank in New York, said in an interview with Bloomberg Television. “With weakness overseas, you’re also seeing fewer orders for U.S. manufactured goods.”

Factory orders were forecast to fall 2.3 percent, after a previously reported 5.1 percent drop the prior month, according to the median estimate of 60 economists surveyed by Bloomberg News. Projections ranged from declines of 0.4 percent to 6.5 percent.

Factory sales plunged 5.3 percent in November, the biggest drop on record.

Orders for durable goods, which are those meant to last at least three years and make up just less than half of total factory demand, dropped 1.5 percent. Commerce estimated the decline at 1 percent in a Dec. 24 report.

Aircraft Demand

Boeing Co., the world’s second-biggest commercial-airplane maker, said it received 7 orders for aircraft in November, down from 14 the previous month. The Chicago-based company resolved an 8-week strike on Nov. 1 by 27,000 machinists that may have weighed on that month’s orders.

Bookings for autos and parts declined 0.1 percent. U.S. automakers remain in a slump. Automakers sold 10.3 million light vehicles at an annual rate in December, capping the worst year for the industry since 1982, according to industry figures released yesterday.

Excluding transportation gear, bookings dropped for a fourth consecutive month.

Demand for capital goods excluding aircraft and military equipment, a measure of future business investment, increased 3.9 percent, less than Commerce estimated in last month’s durable goods report. Shipments of those goods, used to calculate gross domestic product, dropped 0.2 percent, wiping out the previously estimated gain.

Plunging Prices

Orders for non-durable goods plunged 7.4 percent, paced by declining demand for petroleum, chemicals and plastics that partly reflecting falling commodity costs. Orders for petroleum and coal products fell 21 percent.

The bad news probably continued last month. Factory activity contracted in December at the fastest pace since 1980, the Tempe, Arizona-based Institute for Supply Management said last week. The group’s measure for new orders reached its lowest level since record-keeping began in 1948, and prices slid the most since 1949.

Worthington Industries Inc., the largest U.S. maker of steel frames for cars and buildings, on Dec. 18 reported a second-quarter loss of $159.5 million compared with a $14.7 million profit a year earlier as the global recession sapped demand for automobiles and buildings.

The U.S. economy contracted at a 0.5 percent annual rate in the third quarter, the Commerce Department said Dec. 23. The economy is projected to shrink at a 4.3 percent annual rate, the biggest contraction since 1982, according to the median estimate of 51 economists surveyed last month by Bloomberg."

All these downturns are a Proactivity Run, meant to shed costs faster and in a larger amount than the actual sales decline. Obviously cutting back on orders is part of cutting back on costs. The intertwined action of all the variables is one reason the cutbacks are so large.

"Maybe the housing crash and mortgage modification that followed have something to do the recession of 2008."

Casey Mulligan got a lot of grief for this post:

"Want to Cut Your Debt? Work Less

Copyright, The New York Times Company

Mortgage modification programs create terrible work incentives and are ubiquitous these days, and this is one reason why this recession is so different from previous ones.

In most cases, a homebuyer takes out a mortgage that covers only part of the value of the house he’s buying. In other words, the house a person buys is worth more than the mortgage he owes on it. This means that in the event of borrower delinquency, the lender can, in most cases, obtain his full principal by foreclosing on the house and selling it to a new purchaser.

However, housing prices have fallen dramatically since 2006. By 2008, about 12 million mortgages were “under water” – meaning that market value of the house had fallen below the amount owed on the mortgage. Because of the low resale values, foreclosing on any of those homes will not yield lenders their entire principal; lenders in those cases must rely on the good behavior of the borrowers.

Officials at the Federal Reserve, the United States Treasury, the F.D.I.C., Fannie Mae (most recently, its “Early Workout” program) and Freddie Mac have encouraged lenders in such cases to “modify” mortgages – that is, to accept a stream of payments from the borrowers that is different from the amounts promised when the mortgages were initially signed. In particular, these “modification programs” encourage lenders to reduce mortgage payments so that each borrower’s housing payments (including principal, interest, taxes and insurance) are 38 percent of the borrower’s gross income( THEN THEY'RE PROPORTIONAL. THERE'S NO INCENTIVE TO MAKE LESS. ). The payments are to be reduced for the next five years, or when the mortgage is paid off (whichever comes first).

Of course, a borrower cannot be harmed by the opportunity to have his mortgage payment reduced. But what is economically noteworthy is that the amount of the payment reduction depends on the borrower’s income – the less he or she earns, the more the payment is reduced. ( I'M NOT SURE I UNDERSTAND THE CONCERN. SURELY IT'S BETTER TO EARN MORE AND PAY MORE THAN TO EARN LESS AND PAY LESS. FOR ONE THING, YOU WILL HAVE MORE MONEY AFTER YOU'VE MADE THE HOUSING PAYMENT. ) For example, a borrower whose annual family income is $100,000 can have her housing payments reduced to $38,000 per year, whereas a borrower whose annual income is $50,000 can have his payments reduced to $19,000 per year.( THAT ISN'T A GOOD REASON TO EARN LESS. I DON'T UNDERSTAND THIS. )

One implication of the mortgage modification rules is that a family that earns $50,000 less in the year prior to their modification stands to save $19,000 per year for the following five years – or a total of $95,000 on its housing payments! Those are 95,000 reasons to hesitate when looking for a new job, when wrapping up a maternity or paternity leave, or when confronting other job transition situations. ( NOT IF YOU CAN EARN MORE. IS ALL THE EXTRA MONEY GOING TO HOUSING PAYMENTS? )

I do not expect every adult among those in the 12 million underwater households to be without a job because of the modification rules( ARE YOU SAYING THAT THEY QUIT THEIR JOB? THEN THEY DO NOT RECEIVE UNEMPLOYMENT BENEFITS. ). Although modification professionals have specialized in educating homeowners about their modification options, many homeowners probably do not fully understand the mortgage consequences of their earning decisions. Nobody knows the exact numbers, but, even if 90 percent of homeowners were oblivious or uninterested in their modification options, that would leave over a million households that were aware. One million plus workers would make a large dent in the employment statistics.

My previous post reminded readers that productivity has been rising and employment falling in this recession. If approximately one million workers realized that earning income in 2008 was not in their financial interest – and acted on this realization – their actions would have the effect of significantly reducing aggregate employment and hours. As businesses operated with less labor, labor productivity would rise. Maybe the housing crash and mortgage modification that followed have something to do the recession of 2008."

I don't see the incentive at all. Quitting your job will make you much poorer, since you won't have any income, and if you're fired or let off, that has nothing to do with your housing payments. Once fired or let off, your payments are proportional to what you earn. There's no incentive to stay out of a job if you can get one for mortgage payments. For one thing, you have to look for a job for UI, and any fool knows that you should take a decent job if you're offered one. You never know when you'll be offered another. I must have missed something.

My explanation is that employers have been laying off workers proactively due to the fear and aversion to risk. In other words, they have been letting workers go even though demand hasn't fallen enough to justify the layoffs. That's why productivity is rising. I'm putting the fear and aversion to risk now rampant in the economy up against loan modifications as an explanation of rising productivity, and readers can decide which explanation is more probable.