Where Job Losses Will Bite Deep

07/22/2008 12:00 am EST


Gary Shilling

Columnist, Forbes

Gary Shilling, editor of Gary Shilling’s Insight, says the mild job losses we’ve seen so far will accelerate as the recession spreads, and he names some vulnerable sectors.

We’re convinced that the US economy is in recession, but so far the labor market has not weakened appreciably. True, payroll employment has declined for five consecutive months, but the declines pale in comparison with past recessions.

Indeed, the weakness in payrolls, real GDP, and other aggregate economic measures has been so limited thus far that most forecasters, investors, and maybe even the Federal Reserve believe that a recession has been avoided. Not us.

Many economists don’t worry about recessions until consumer spending and GDP hit the skids. That will probably happen in the second half of this year after the meager spending from tax rebates is exhausted. And that’s when jobs will disappear in earnest and the unemployment rate will mushroom. We expect it to reach 7.2% at the recession’s bottom in the second quarter of 2009.

So, lots of jobs will be lost, but in what sectors and industries? It’s easy to point to residential construction. Deleveraging financial firms are also handing out pink slips with gay abandon. Since last July, 28 Wall Street firms have announced 83,000 job cuts.

Furthermore, the high-fuel-cost-induced latest consolidation of airlines is forcing the shedding of jobs, including well-paid pilots. Also, look for big layoffs in cruise lines, recreation and travel, and hotels. Restaurants and bars, which have seen big employment growth in recent years, will suffer as Americans save money by eating at home, and when they do eat out, they’ll favor cheaper fast food over white-tablecloth restaurants.

With new construction and home remodeling in the doghouse, layoffs will jump among producers, distributors, and installers of home furnishings, furniture, building materials, HVAC equipment, etc. Less driving and weak auto sales will curb demand for tires, batteries, and other new and replacement auto equipment, as well as repair shop services and service stations.

So, the 4.0% peak-to-trough decline in real GDP we’re forecasting will reduce household survey employment by 3.1%, or 2.7 million. [That number] pushes the unemployment rate to 7.1% at its peak at the recession’s bottom in mid-2009.

Financially pressed consumers, however, may decide not to leave the labor market and search for income-producing jobs, even in the face of rising unemployment rates. If the labor participation remains unchanged, the job losers will all count as looking for work and the unemployment rate will jump to 8.2%. This is a high number, but not extraordinary by historical standards in relation to the severity of the recession we foresee.

The first phases of the recession have done little to hike unemployment and, as a result, have lulled many into believing that no recession, at least in the conventional sense, is likely. But [ultimately], leaping joblessness will turn those sweet dreams of a nearby economic recovery into the nightmares of deep recession reality.

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