Stephen Foley: Don't despair as US jobless rate hits 10 per cent

US Outlook: Employers make investment decisions based on their own, on-the-ground business experience, not on round numbers
Click to follow
The Independent Online

There is both beauty and beastliness in round numbers. The US unemployment rate has been marching determinedly upwards for two years, but the fact of its passing 10 per cent is no less startling for that. That it has happened a month or two earlier than most forecasters predicted only added to the breathlessness of the headlines.

But round numbers tempt us to overestimate their significance. Like Dow 10,000 – the stock market bar that journalists describe, deliberately vaguely, as "psychologically important" – the difference between 9.8 per cent in September and 10.2 per cent in October is not actually that significant.

For the family on food stamps, or the freelancer who has been without a project for months, or the assembly line worker hearing rumours of lay-offs, it is not the number in the newspaper that is driving their decisions about how much to spend and how much to save this Christmas. It's a grim economy out there. Tell us something we don't already know.

It has always been unreasonable to assume that the US consumer, burdened by debt, anxious of their employment prospects and traumatised by the collapse in the value of their houses and pensions, would be the motor that brings us out of recession.

Re-employment always lags the economic rebound, as businesses squeeze as much extra juice as possible out of their existing workers. Little wonder productivity gains in the third quarter were four times the historic average. If anyone had thought the snap-back in employment would be quicker this time, perhaps because the lay-offs had been so swift in the first place, yesterday's numbers dashed that hope.

There were a few good signs buried underneath the headline gloom, though. The number of temporary workers rose, indicating that employers are in need of more hands, even if they are not willing to hire full time. The average weekly wage rose.

And there were reasons to be cautious about that large jump in the unemployment rate. It comes from a phone survey of households, and has a higher margin of error than the survey of employers that gives us the actual payroll numbers. According to that more statistically robust report, the US economy shed 190,000 jobs last month, still on an improving trend. Taken together with the upward revisions to the September figure, that puts the number of jobs in the economy exactly in line with forecasts.

Employers make investment decisions based on their own, on-the-ground business experience, not on round numbers. Third-quarter earnings beat expectations at more than three-quarters of the companies in the S&P 500, freeing up money to start the process of rehiring in the near future. The broad outlines of a recovery – a stuttering, shallow recovery, but a recovery none the less – remain in place.

Smart money at Ford

The unsung heroes of Ford's return to profitability this week are the men and women of the carmaker's finance department.

It is three years this month since they mortgaged almost all of the company's assets – from assembly plants to the intellectual property behind the iconic blue oval logo – and began to hunker down for a recession. Good timing, not unrelated to the arrival at the company of Alan Mulally, ex of Boeing, the first chief executive to come from outside the clubby and emotional auto industry.

The finance department's sharp moves have included buying back Ford bonds, when they were trading at depressed levels, and issuing new shares to investors when that was the cheapest way to fund a new workers' healthcare trust.

In raising absolutely as much as the debt and equity markets would allow, whenever a brief window opened, the company managed to avoid the fate of its Detroit rivals. And while General Motors and Chrysler made a pitstop in bankruptcy court to fill up on taxpayer cash, Ford was able to steal market share from them.

But there is time only for a quick toot on the horn in appreciation. Unsupported by bailout money, Ford now has higher debts than its peers and its financiers have already had to turn their attentions to rearranging its debt repayment schedule. They are pros. They'll keep Ford on the road.

Warren loses marks for dumbing down

Elizabeth Warren does a disservice to herself and to Congress when she misrepresents her own report into the Wall Street bailout. The Harvard professor heads the Congressional Oversight Panel – not coincidentally abbreviated to COP – monitoring the bailout, and she popped up all over the place yesterday to highlight the panel's latest work on the financial guarantees that the Fed and the US Treasury gave last year. These included promises to backstop money market funds, to cover losses on some banks' loans, and to insure new debt issued by financial institutions.

Obviously there are eye-popping numbers involved. At the height of the panic, the US government was "on the hook" for up to $4.5 trillion, Professor Warren incanted in her media appearances. And in the tut-tutting manner of someone who has just discovered the source of a bad smell, she talked about moral hazard, without pointing out her panel has suggested precisely nothing that can be done about that.

The real meat in the report is its totting up of the fees the US taxpayer has earned from those guarantees. Any bank that sold debt with taxpayer default insurance had to pay for the privilege, which rather takes the edge off the moral hazard argument. Some $17.4bn has come into the coffers and, so far, only $2m has been lost. Only the insurance of Citigroup's toxic loans threaten to swell that figure, with perhaps $4bn being lost under a really dire economic scenario.

The problem is that one doesn't get on telly by praising the government for saving the financial system and making money to boot. Professor Warren's schoolma'am soundbites and chat-show charm gave her a powerful role in explaining and challenging the bailout. But where initially she elevated the public debate, now she seems intent on dumbing it down.

Comments