Note: This post was written on October 20, 2008.
Just when it looks like markets have started to stabilize, individuals now face another wicked problem: the prospect of job loss. Layoff announcements have started to trickle in from all quarters. It’s hardly surprising to hear about still more problems in the automotive sector, recent recipients of a relatively miserly $25 billion aid package from the Government. But in technology land Yahoo! is expected to announce sizable cuts and retailer Circuit City will also join the list of choppers.
On Saturday, I went to a mall in Suburban Chicago. Parking places were scarce, retail counters busy. No chatter of stock market woe. It is a tonic to escape New York when thinking about the economy these days.
With a spate of layoffs kicking in, worrying about your 401(k) starts to look like a high-class problem. And more job cuts will get announced in the coming weeks and months. Welcome back to the Business Cycle. Though it failed to garner many headlines, the economy actually put in some solid growth up until late last year. Now it is slowing down. And, in time, it will speed up once again. This process has occurred with regularity since World War II. Still, familiar pain is still pain. A great debate is how deep this recession will become and how many jobs will go with it. In the past few decades, recessions have become shallower and growth periods longer. Many economists now think that trend will reverse itself, resulting in a sharp contraction. We’ll call these economists the Japanese Club. The Japanese Club anticipates the unemployment rate, currently 6.1%, will rise toward 10%. On top of that, economic growth will remain persistently week for an extended period of time, maybe for years. This would mirror the debacle of the Japanese economy after its stock market and property bubble burst, leading to the “lost decade.” Other economists, admittedly tougher to find in this environment, think the U.S. economy and markets will bounce back more quickly. We’ll call these folks the Swedish Club. Our Scandinavian friends had a terrible banking crisis in the early 1990s. They nationalized the banks (sound familiar?) and the situation soon righted itself. This group sees the unemployment rate ticking up toward 7.5% and growth bottoming out for two quarters before kicking back in the middle part of 2009. The Swedes have fewer bullets in their gun. They are counting on a rapid recovery in the credit markets so that companies can quickly start borrowing again as they usually have. The Swedes also count on quick, creative destruction in the economy. Weak players, such as Circuit City and Chrysler, quickly merge, fold or slash their workforce and operations. Stronger players, such as Best Buy and Toyota, move in and take advantage of the situation, expanding where their foes retreat. Which scenario is more likely? On Saturday, I went to a mall in Suburban Chicago. Parking places were scarce, retail counters busy. No chatter of stock market woe. It is a tonic to escape New York when thinking about the economy these days. As we see the Swedish model coming into play in our financial sector, my bet is with the Swedish Club, and not just because I like lutefisk. Even so, a recession is a recession, and a lost job hurts. But a quick rebound means more jobs will return faster. Maybe that’s why Warren Buffett is buying American stocks these days.