Making Up for 2.5 Million Job Losses
The potential upside from these economic factors could dwarf the downside of job losses.
Employment levels are an important factor in determining consumer spending, which, in turn, drives more than 70% of the U.S. gross domestic product. Markets today are as highly fixated on the employment numbers as they were on money supply in the early 1980s and the trade numbers in the mid-1980s.
But we think this laser-beam focus is misplaced.
In general, employment numbers are backward-looking and in many cases are actually lagging indicators of where the economy is going. If you think about it, the lagging nature of employment data makes a lot of intuitive sense. Because firing workers is so painful, managers are often reluctant to make cuts until they have to. As the economy rebounds, employers are often reluctant to rehire employees until they are absolutely sure their business has turned. Therefore it is not surprising that much of the employment data we see is either a lagging or, at best, a coincident indicator.
We also need to set the employment data in the context of what it means in dollars and cents compared with other economic factors.
First, let's look at what one job means to the economy. Simply dividing the total wages and salary number from the the Bureau of Economic Analysis personal income report by total employment, we get about $50,000 per employee. So, the loss of one job has an annual effect of approximately $50,000. This excludes a lot of things like payroll taxes and pension contributions, but those aren't immediately spendable, either.
So, for every 1 million jobs lost, we would lose about $50 billion of GDP annually. My current forecast for unemployment implies that the U.S. economy will probably lose another 2-3 million jobs from December forward, on a base of 137 million jobs. This could shave maybe $125 billion off of GDP. That sounds like a lot, and it is certainly painful for those who do lose their jobs, but from an economic perspective, it's also important to put employment in a broader context, including the factors that could offset this loss.
Below is how a loss of 2.5 million jobs compares with some other important inputs in the economy. We could undoubtedly find a lot of negative offsets, too, and not each and every one of these things will come to pass. These are not meant to be forecasts or even very exacting estimates. Rather, they are intended to identify potential opportunities that are often overlooked in the barrage of negative news.
Yes, the employment numbers are an important piece of the puzzle, but not the only piece. So brace yourself for more bad news, but also keep your eye on the bigger picture.