The November payrolls decline of 533,000 was enormous and the biggest since December 1974.
The sky has fallen. The sun also rises.
If there was ever a time to remind investors that the labor market is a lagging economic indicator, economists say today is such a day. Once the knee-jerk, doom-and-gloom reaction is over, something resembling optimism will prevail with the conclusion that the worst is over for the economy.
“This is history,” says veteran Wall Street economist Ram Bhagavatula. “December payrolls will be weak as well. The leading indicators will come from a slow re-activation of the credit markets and increases in consumer spending. You should begin to see that in the next couple of months.”
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Bhagavatula is among a growing number of economists who say the seeds of recovery are already in place, even if they are revising their forecasts for GDP contraction in the fourth quarter to show an even greater decline.
"Every recession has its worst day, and this is probably the worst day," says Chris Rupkey of Bank of Tokyo-Mitsubishi.
Economists point to historical data and recent developments as solid grounds for optimism.
"This number is a unique number because it reflects an unprecedented economic situation, which began with the bankruptcy of Lehman on Sept 15, “ says long-time Fed watcher David Jones, of DMJ advisors. “The economy has never been shut down as quicly as it was following that bankruptcy. The economic response to that cut off in credit is unprecedented.”
Jones points to significant downward revisions in September and October payroll losses.
Indeed, the November payrolls decline of 533,000 was enormous and the biggest since December 1974, when they dropped about 600,000. But declines after that month—in what might be considered closer to the end of the recession than the beginning—were much less severe.
“Severe drops like this (the Sept.-Nov payrolls ) cannot be sustained,” says Robert Brusca, chief economist at Fact & Opinion Economics. “It suggests we are getting so weak there will be a turnaround."
One-off staggering declines in GDP are also not unheard of. At its worst in the 1980 recession, GDP fell by 7.8 percent. In the immediate aftermath of the jobs data release, some economists said the fourth quarter contraction could hit 8 percent. The consensus, which happens to be shared by Jones, is 5 percent.
“The fourth quarter will be the cathartic period,” says Brian Bethune, senior US economist at Global Insight. “Once you have a steep drop like that, even a steady weak state starts to look better.”
Economists say there’s a lot of tailwind to drive an economic recovery and already emerging signs of one.
“There's now starting to be some visibility about how this might end.” Says David Resler, chief economist at Nomura International.
Resler and others point to a host of mitigating factors, including sharply lower gas prices, the steady and gradual decline in Libor rates and the very recent improvement in the mortgage market, a revival in the corporate bond market and the massive stimulus package expected from the Obama administration as soon as possible in January.
Of course, there is the extraordinary series of measures and instruments the Federal Reserve and Treasury have thrown at the credit markets and the economy in the wake of the Lehman bankruptcy.
“When monetary and fiscal policies work this hard, you get a bounce,” says Bhavagatula.
Economists specifically point to two recent developments: the massive and timely financial support for Citigroup (NYSE: C) and the Fed’s announcement last week that it would buy some $600 billion in mortgage-backed securities.
The latter triggered a stunning one-day decline in mortgage rates and added to an emerging suspicion that housing may bottom sooner than expected. Going forward, economists point to the Obama stimulus package, estimates for which now range between $300 billion and $700 billion, with the majority leaning toward the high side.
That package is expected to include immediate tax cuts for low to middle-income earners, infrastructure spending as well as well as a number of other measures to boost consumption and spending.
“You don't even need to know what's in the package,” says Jones “You just want it to be bigger than everyone thinks,” saying part of the goal is to “big enough to make people rebuild confidence.”
Jones and others many other economists aren’t expecting a strong recovery from the recession, whose start was officially declared to be December 2007 by the National Bureau of Economic Research earlier this week. But they see a positive GDP as early as the second quarter of 2009.
Resler sees a gradual pickup and modest growth for one to two years before the economy approaches sustainable trend levels.
Optimism—guarded or otherwise—is not universal.
Lawrence Mishel, president of the Economic Policy Institute, says too much emphasis is placed on GDP as a measure of economic health.
“The question is when unemployment will stop rising,” says Mishel, who worries it will take years to replace all the jobs that will be lost.
He’s also concerned about the consumer’s balance sheet after a double shock to the system, “The loss of housing wealth and stock wealth is behind the steepest decline in spending we've seen for a long time.”
That said, momentum and psychology can change quickly.
Bethune, for one, isn’t ruling out a big-quarter break out in growth, such as the near 8-percent surge in GDP during the third quarter of 2003, following the last recession.
“The economy takes off and everyone is scrambling,” he says. And that includes, investors in stocks.
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