Uncomfortable Answers to Questions on the Economy
by Peter S. Goodman
Tuesday, July 22, 2008
(Page 2 of 2)

Is My Job Safe?

Economic slowdowns always mean job losses. Unemployment already has risen, and almost certainly will increase more.

The first signs of distress emerged in housing. Construction companies, real estate agencies, mortgage brokers and banks began laying people off. Next, jobs started being cut at factories making products linked to housing, from carpets and furniture to lighting and flooring.

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But as the real estate bust spilled over into the broader economy, depleting household wealth, the impacts rippled out to retailers, beauty parlors, law offices and trucking companies, inflicting cutbacks throughout the economy, save for health care, farming and energy. Over the last six months, the economy has shed 485,000 private sector jobs, according to the Labor Department. Many people have seen hours reduced.

The unemployment rate still remains low by historical standards, at 5.5 percent. And so far, the job losses — about 65,000 a month this year — do not approach the magnitude of those seen in past downturns, particularly the twin recessions at the beginning of the 1980s, when the economy shed upward of 140,000 jobs a month and the unemployment rate exceeded 10 percent.

But Goldman Sachs assumes unemployment will reach 6.5 percent by the end of 2009, which translates into several hundred thousand more Americans out of work.

These losses are landing on top of what was, for most Americans, a remarkably weak period of expansion. From 1992 to 2000 — as the technology boom catalyzed spending and hiring — the economy added more than 22 million private sector jobs. Over the last eight years, only 5 million new jobs have been added.

The loss of work is hitting Americans along with an assortment of troubles — gasoline prices in excess of $4 a gallon, over all inflation of about 5 percent, and declining wages.

“In every dimension, people are worse off than they were,” said Mr. Roubini, the New York University economist.

Are Consumers Done?

That is a major worry.

The fate of the economy now rests on the shoulders of the American consumer, whose spending amounts to 70 percent of all economic activity.

When people go to the mall and buy televisions and eat out, their money circulates through the economy. When they tighten their belts, austerity ripples out and chokes growth.

Through the years of the housing boom, many Americans came to treat their homes like automated teller machines that never required a deposit. They harvested cash through sales, second mortgages and home equity lines of credit — an artery of finance that reached $840 billion a year from 2004 to 2006, according to work by the economists James Kennedy and Alan Greenspan, the former Federal Reserve chairman. That allowed Americans to live far in excess of what they brought home from work.

But by the first three months of this year, that flow had constricted to an annual rate of about $200 billion.

Average household debt has swelled to 120 percent of annual income, up from 60 percent in 1984, according to the Federal Reserve.

And now the banks are turning off the credit taps.

“Credit is going to remain tight for a time potentially measured in years,” said Mr. Tilton, the Goldman Sachs economist.

This is the landscape that has so many economists convinced that consumer spending must dip, putting the squeeze on the economy for several years.

“The question is, will it get as bad as the 1970s?” asked Mr. Rogoff, recalling an era of spiking gas prices and double-digit inflation.

Long term, Americans may have no choice but to spend less, save more and reduce debts — in short, to live within their means.

“We’re ge