Initial Jobless Claims were released this morning and they were far worse than even the very pessimistic Bloomberg Survey expected them to be. A quick note is in order on Initial Jobless Claims…this is a WEEKLY figure that tracks the number of NEW filings for jobless benefits. The Bloomberg Survey expected that 580,000 people would file for initial jobless benefits last week…in actuality 626,000 people walked in and filed. 626,000 people in a week. According to Bloomberg that is a 26 year high.
In the prior release the survey also fell short of reality as they expected 588,000 initial claims and we actually got 591,000. Since jobless claims surprised on the high side of an already terrible expectation in the prior week, it looks as though the survey thought things couldn’t get worse because they lowered their expectation for this week’s number. After being beaten on the high side the survey dropped the expectation from 588k to 580k…and then the market delivered this week’s 626k…beating the estimate by a much larger amount than it did on the prior release.
Here is a number that surprised everyone in this office…last MONTH 2.8 people filed for initial jobless benefits. That’s a lot of people on the street and there doesn’t appear to be a quick end to this process.
A longer term look at Initial Claims shows that we are at 1980’s type levels of claims.
The graph of consumer credit below is a lagged series…the data is two months old when released. This index covers most short-term and intermediate-term credit extended to individual, excluding loans secured by real estate. The graph below shows how much the consumer began tightening up toward the end of 2008. The last data point on the graph below is from 11/30/08 and it’s among the largest drops in the history of the series. This isn’t entirely unexpected. As consumers begin realizing that times are going to get tougher, they save more, spend less, and clean up their balance sheet. This is a good news/bad news proposition for the economy. Americans with stronger balance sheets is a very good thing, but the process of getting to that point will involve a lot of friction. By definition the more the consumer saves the less he spends, and the consumer is 2/3’s of GDP. You don’t need as many people selling cars and TV’s if the consumer quits spending, so the economy sheds job.
Taking a look at the big picture we can use the Federal Reserve’s Total Consumer Credit Outstanding index that I’ve attached below. This index is also lagged by two months so the numbers do not reflect anything that has happened since 11/30/08. Total Consumer Credit Outstanding also shows signs of reduction. Some of this will happen as consumers clean up their balance sheet and some will happen as consumers go bankrupt.
The governments current plan is to get spending going again and to gets banks lending. They would love to see the line below keep moving up. But that begs the question…where does it stop? Eventually we’re going to have to pay back the trillions of dollars that are being spent to revive the economy. If the consumer is so saddled with personal debt when the payback period on the government debt begins, where will it leave us? How can the economy be expected to grow in the future if it’s burdened by tremendous amounts of debt and the higher taxes needed to pay it off?
The graph below shows that total consumer credit outstanding as of 11/30/08 was $2.57 Trillion. Even if you just do the minimum monthly payment the consumer is having to come up with a decent amount of cash every month to service that debt. Now throw on top of that consumer debt figure the additional debt that will be issued to fund the government spending over the next few years and you’ve got a very large obligation to deal with. Taxes will have to go up to fund the government spending, which will reduce after tax cash flow with which the consumer can pay back his personal debt or invest in prospects that would spur economic growth.
As it stands now the government wants to issue a few trillion dollars in debt, create a bunch of government jobs, and force the banks to make loans that will push total consumer credit higher at the same time. Conceptually I wonder what our prospects for growth will look like at the end of all of this. It would seem reasonable that once we get this apple-cart stabilized there will be so much debt to pay off that there won’t be much money left over to fund future economic growth. Could we be looking at years of GDP growth in the 0 to 1% range? As ugly as the current situation is, some of the answers under consideration look even worse.
If you have any questions on this material or if there is anything I can be doing for you just let me know.
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