U.S. Economy Facing a Protracted Economic Slump

The Philly Fed manufacturing report suggests that another recession may be on the horizon. A quote,

The demand for manufactured goods, as measured by the current new orders index, paralleled the decline in the general activity index, falling 27 points. The current shipments index fell 18 points and recorded its first negative reading since September of last year. Suggesting weakening activity, indexes for inventories, unfilled orders, and delivery times were all in negative territory this month.

Firms’ responses suggest a deterioration in the labor market compared with July. The current employment index fell 14 points, recording its first negative reading in 12 months. About 18 percent of the firms reported an increase in employment, but 23 percent reported a decrease. The percentage of firms reporting a shorter workweek (28 percent) was greater than the percentage reporting a longer one (14 percent). The workweek index fell 9 points.

How does this square with the unemployment data showing a fall in claims? The unemployment insurance claims report shows that the job market remains stagnant as it has been since the official end of the recession. This stagnation in the job market is reflected in low consumer confidence. (Gallup report: Americans’ Satisfaction With National Conditions Dips to 11%) Structural problems are the cause of the stagnation in the job market.

It is globalization that is responsible for creating structural unemployment. Writes Karl Smith in an article titled “Manufacturing collapse,” published in The Washington Post, “…[the] real manufacturing recession began in 1999 and simply never stopped. What’s amazing is that we had any recovery at all.” America, Smith writes, “had been in a recession ever since the dot-com bubble burst…The job loss that began in 1999 has continued at a greater or lesser pace ever since. More likely this is the result of globalization.”

Globalization also causes a decline in investment in the U.S; even now companies are investing abroad, and GE is a case in point. The company has moved its X-ray research to China, where it hired 100 engineers and where it will invest $2 billion. Why would GE do this in a time of great unemployment and under-investment in the U.S.? Because foreign markets are better risks for future growth than the U.S. market. Few companies believe that it makes good business sense to invest in America. Lack of investment will keep the job market depressed. And don’t put much stock in the official unemployment numbers; they will fall in the coming months, but not because there are more jobs — unemployment insurance will run out for many and more will drop out of the job search.

Lack of investment contributes, through lack of jobs, to a fall in demand. Demand is also falling because U.S. household net worth has not recovered from the 2007 recession. Household net worth has been a predictor of prior recessions. Smith writes in “Structure of a Recession, Part 1”:

The red line indicates the net worth of U.S. household, plotted on the right axis. It flattens out and declines just before 2001 and collapses in 2007. In each case it precedes the weak job market by about a year and in each case the job market does not turn around until net worth starts rising again.

Lost household net worth and the weak job market combine to create conditions ripe, if not for another recession, then for a long slump. Historically, the U.S. economy experienced its longest economic slump in the 1870s, when the economy remained stagnant for six years (1873-1879). If we were to posit that the economy has not actually recovered since the December 2007 crash in terms of getting back the more than ten million unemployed back to work, then we’re nearing that record slump of the 19th century; we’re five years into a decline.

Such weakness in the economy sets the stage for a Great Depression II if there is a significant economic shock in the near future. For example, one kind of shock could include deep spending cuts and reductions of various government benefit schemes that inject tens of billions monthly into the economy. Another shock could include the election of a candidate into the White House who represents right-of-center populism and ideological hostility toward monetary policy initiatives to offset contractionary fiscal policies. Combined with  a contractionary fiscal stance, this could lead to a deflation.

But the socal pressures of millions of unemployed will certainly make themselves felt. Politicians are likely to push for solutions that create a more competitive environment, meaning lower wages, fewer benefits and fewer rights for more workers in more sectors. In the end, the only way to get back jobs lost to globalization is to reproduce here in America the appalling conditions found in the most “competitive” countries, like China. Globalization is an economic race to the bottom and only slave workers in police states are ultimately the most competitive workers in the global economy.