Spring Break
Honey, economically, you ain't seen nothin' yet
Shawkat Hammoudeh
Issue date: 12/5/08 Section: Ed-Op
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John: Let us talk about unemployment first because the consumer is two-thirds of the gross domestic product. One Wall Street Journal headline reads, "Job Losses Surge as U.S. Downturn Accelerates." What's happening to unemployment?
Mary: Unemployment has risen across the nation. The national unemployment rate has increased from 6.1 percent in September to 6.5 percent in October, the highest rate in 14 years. In fact, 12 states reported at least a 2-percent point increase in their unemployment rates over the last year. The four-week average of claims is the highest in 25 years. The number of people continuing to claim unemployment insurance rose sharply to more than 4 million, the highest since the end of recessionary 1982. Concurrently, disposable income dropped at an annual rate of 9.2 percent in the third quarter, the highest drop in records that date to 1947.
John: This is the current situation. How about the future?
Mary: Goldman Sachs predicts that the unemployment rate will ultimately reach 8.5 percent, meaning a 7 percent output gap between actual and potential outputs.
John: What's your prediction about the size and duration of this ongoing recession?
Mary: Let us compare the current situation to the two most severe recessions, the 1973-75 and 1981-83 recessions. In the former recession, which lasted 16 months, unemployment rate reached 8.7 percent, and in the latter it reached 10.7 percent. When it's all over, the unemployment rate for the current recession may match the 1981-83 rate or worse.
John: How about inflation? Oil has dropped by about $100 since July 2007.
Mary: Inflation and inflationary expectations are going down. Now, we have to worry about deflation. Are you familiar with deflation? It is a persistent decline in consumer prices below zero inflation over an extended period of time. It is usually accompanied by contracting credits and zero economic growth. The consumer price index dropped by 1 percent in October, the steepest one-month decline on record. The chances for deflation are rising. Some econometric models predict that deflation, or at least an end to inflation, are on the way. However, they do not foresee a lost decade for Europe, the U.S. or the global economy. But we are not sure deflation will not happen again. A global bubble just burst, and we are now in a global recession accompanied with a liquidity trap and contracting credit - all are ingredients for deflation.
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