"It's a recession when you lose your job; it's a depression if I lose mine." That's a traditional definition that I've always found more useful and certainly more vivid than the work of economists.
It also suggests the key role that projections play in determining our economic behavior.
The economists and the market strategists can talk all they want about the wealth effect and the direction of housing prices, but I don't think there's any economic factor that matches up to the importance of jobs when it comes to figuring out whether this precariously balanced economy will slip back into recession or struggle through to a sustained recovery. Nothing influences economic behavior more strongly than our individual projection about whether we'll have a job tomorrow or how easy it will be to find a new one if we get laid off.
The stock market, which anticipates the news, isn't about to go much of anywhere if the number of Americans without jobs looks likely to rise significantly again. People who are worried about paying the bills don't put cash into stocks.
Measuring the Mood
So what do we know about how U.S. consumers and investors are feeling about the job market? And what can we project about the actual trend of the job market?
Dispirited. That's a reasonable description of feelings about the current job market, according to the Conference Board's survey of consumer confidence completed on March 18. Thirty-two percent of the respondents said jobs were hard to find, that's up from 30% in mid-February. Just under 12% -- 11.6%, to be exact -- of the respondents said jobs were plentiful, the same figure the last time the survey was conducted.
Current attitudes toward the job market are a reasonably accurate reflection of what has happened in the job market in the recent past. According to Chicago outplacement firm Challenger, Gray & Christmas, 2.5 million workers have lost jobs in announced layoffs in the period from Sept. 1, 2001, to Feb. 28, 2003. (Many economists think the Challenger numbers understate layoffs because they include only publicly announced layoffs.) The number of layoffs over the last 18 months is up 54% from the number in the previous 18 months.
But looking out over the next six months, the Conference Board's survey finds respondents significantly more positive, at least as of the March 18 survey date. If the respondents aren't anticipating a full-speed-ahead economic recovery, they also aren't expecting to see things get worse, either. In February, optimism slowly started creeping back into the job-prospect numbers, with only 26% of those polled saying fewer jobs will be available in the future. That's down 2% from the previous month. But those people who felt there will be more jobs in coming months slipped to 11% in February from 12% the prior month.
Slow Erosion of Optimism
Those good-news, bad-news numbers reflect a slow erosion of our customary optimism about the economy in the face of what even before the actual outbreak of war with Iraq looked like a strikingly jobless recovery. Most of us are convinced that the economic future will be brighter than the past. And why not? Given the economic history of the United States in the lifetime of most of those now alive, that's a reasonable belief.
But the economic job numbers over the last few months have been extremely disappointing. According to Challenger's figures again, the number of layoffs hit 138,177 in February, up 5% from January. That was the highest monthly number since November 2002. The expectations for March numbers, to be announced on April 1, are for 138,000 new layoffs. If things are getting better, you sure can't see that in the numbers.
Other surveys confirm this increasing pessimism about the job market and the economy. A survey of worker confidence by Right Management Consultants, for example, found that one in four U.S. workers believe they could lose their jobs in the coming year.
So when it comes to attitudes about the future -- which are much more important in determining consumer behavior than beliefs about the past or even the current environment -- many people are on the fence.
Which is where the professionals wind up, too, when they try to find a trend in these and other employment numbers.
For example, on March 27, the U.S. Department of Commerce reported that the number of people filing new claims for unemployment dropped 25,000 to a seasonally adjusted 402,000 for the week that ended on March 22.
Good news, no?
Maybe. Maybe not.
A Dangerous Trend?
The weekly new claims numbers are so volatile that most economists don't think they're useful in determining any trends in the economy. Instead they use the smoothed four-week-moving average, which showed that new claims fell 4,000 to 422,000.
Still good news, right? Probably not. Any level of new claims for unemployment above 400,000 indicates that the economy is losing more jobs than its creating, economists note.
That slide is confirmed if you look at another part of the unemployment survey. The length of time that the average unemployed worker already receiving unemployment has been without a job is now near 19 months. That suggests that the 7,000 drop in continued claims for unemployment is a result of workers running out of eligibility for unemployment insurance and dropping off the rolls rather than of any pickup in the job market. At 19 months that average duration of unemployment is the highest level in eight years.
Do we have the makings of a dangerous trend here, one that will result in another round of layoffs that will erode consumer confidence even further and result in the collapse in consumer spending that so many forecasters have been predicting for so long?
As I've suggested in my last two columns, drawing any useful conclusions about a trend from current numbers set against the backdrop of an uncertain war in Iraq is extremely difficult. For example, the early stages of most economic recoveries don't produce big jumps in hiring. Instead the data show an increase in productivity as companies uncertain about their customer's plans meet any increase in orders by working the existing workforce harder. New hires are put off until an uptrend is clearly in place.
So you'd expect a jobless period at the beginning of this economic recovery too. (That is, if we are in an economic recovery.) And you'd expect the uncertainties of war to stretch out the jobless stage of any recovery as well. Companies reluctant to hire because of their inability to be sure that their business has turned a corner are even less likely to hire when they add in the business uncertainties that war has brought. So maybe the current lack of hiring is exactly what we should expect at this stage in an economy during wartime.
Fortunately, not all the wild cards are negative. On the same day that the Commerce Department reported the new unemployment claims numbers, it also reported numbers for corporate profits during the fourth quarter of 2002. After-tax profits rose 4.1% in the fourth quarter from the third, marking the third quarter of sequential growth. After-tax profits were still down 4% for 2002. But that's quite a bit better than the 10% decline in 2001.
Much of this profit growth undoubtedly came from corporate cost-cutting rather than from increased sales volumes and higher revenue. In other words, companies made more money by spending less on capital equipment and by cutting costs by doing things like firing workers.
There's nothing in these after-tax profit numbers from the Commerce Department that guarantees companies are about to start buying new equipment or hiring new workers. Management might remain so cautious that it would prefer to scrape by for another quarter with its aging computers and other tools. And companies may even decide that the best strategy at this point is to continue to cut costs in an effort to boost profits even at low-production volumes. After all, profit gain from cost-cutting is something that's within the control of management -- unlike profit gains that depend on increases in orders from customers, which management is largely powerless to control in the short run.
However, profit growth from any source is a prerequisite for the pickup in corporate spending and hiring that is necessary to put an economic recovery on solid ground. That this profit growth is relatively small and is not being immediately used to expand production and hire new workers is exactly what you'd expect in the early stages of a recovery.
Timid Signs of Recovery
So where does all this leave us? I think we're witnessing the timid signs of an economic recovery that is slower to get started and weaker in growth than the typical recovery. That was likely to be the case anyway because of the extent of the capital spending bubble that burst in 2000. Companies had used cheap capital to so expand production that the hangover was likely to be long and painful.
But that recovery has been stretched out even further and slowed even more by the uncertainties of war. Plans to order new equipment that might have been made six months ago for delivery today have been put off by three months or six months as companies wait for the uncertainties of war to come to an end. Hiring that might have been expected to pick up in May could now be delayed until August. I don't have an exact timetable, just a sense that so many plans are on hold because so many people need to know what's going to happen.
While that leads me to believe that the recovery will be slower to arrive than we hoped and weaker than projected when it does arrive, I still conclude that it will pull into the station sometime in 2003.
But there's no guarantee. Because the economy is so carefully balanced between moving ahead and falling back, a shift in sentiment could easily produce just the opposite result. People are worried and uncertain about jobs, the war and the state of the world after the war. Those worries have begun to fray at traditional American optimism about the future. In the near term, at least, I can imagine events that would treat that belief even more roughly -- roughly enough to change plans to buy a car, to take a vacation, to hire another worker, to invest in stocks. I hope not. But in a time of uncertainty, it's wise to take count of what you can't know as well as of what you can.
Jim Jubak appears Wednesdays on CNBC's "Business Center" at 6 p.m. EST. At the time of publication, Jim Jubak owned or controlled shares in none of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.