The Jobs Number Ends the Recession in 9-10 Months

The jobs numbers were really bad. But I think we're almost done with this whole recession thing. Here's why.

In economist lore, recessions are caused by inventory pressure. A normally-functioning economy produces boom-and-bust cycles in various markets, which overheat and eventually create such a buildup of a good or goods that the underlying jobs and corporate profits model behind the industry fails. The result is interconnected collapses in related industries and the reduction of GDP as output slows, inventories stagnate in warehouses, and asset valuations collapse.

A housing market bubble and consequent recession, like we just experienced, is especially insidious because the financial market behind it - almost all houses are purchased with mortgages, massive outlays of financial risk - ALSO experienced a credit inventory buildup that exacerbated the normal boom/bust housing cycle. These interdependent bubbles both grew larger and collapsed harder than they would have without the creation of fictional financial backing in the form of CDO's, SIV's, and Credit Default Swaps. The Federal Reserves constant piling of money supply in the boiler made this train wreck more painful than usual.

One usual characteristic of a bubble preceeding a recession is a massive hiring spree. Many economists have argued that this did not occur leading up to the Dec. 2007 recession, but in looking at the data I disagree - it's not that there wasn't an irrational hiring bubble, but it was camouflaged by sunny historical models of US labor markets and did not account for the fact that, without the fiction in housing/finance, the 2001-2002 recession would have been a jobless recovery.

Returning to 2002 lows means we're almost done. I would suspect that December and January will be ugly months after which we'll see growth and inflation moving disproportionately to each other - small returns in growth will be rewarded with exponentially larger spikes in inflation. That phenomenon will persist until our trade imbalances and immense debt exposure are brought to more appropriate levels. See the Volcker playbook from early in the Reagan administration.

We will also experience a "jobless" recovery until late in 2010, and the 2011 hiring season will be strong. Forecasting that far in the future is something of a leap in faith and nobody wants to hear this, but my thought is that underlying hiring strength will not emerge until Obama's 2009 infrastructure investments start showing returns in the form of nascent industry. I'm also predicating this largely on his Clinton Redux economic team's inevitable budget hawkishness and a largely centrist economic policy, because if he spends like he said he would we can just go ahead and trade our dollars for barter.