Re: Recession warnings

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

> ...   Why? Because of the marvel of United States
>       productivity, the very thing that has allowed
>       the economy to go full steam without creating
>       inflation.
>
>       "What we now herald as a miracle because it
>       holds inflation down becomes a nasty thing in
>       a slowdown," Mr. Paulsen said. "If your
>       productivity is as good in an economic
>       slowdown as it is in an expansion, it
>       accelerates job losses because you can produce
>       more with even less."

Though I agree with the conclusion, the analysis is weak. Faster
productivity growth slows employment slowly, over time. When a recession
hits, productivity growth slows (or even becomes negative) as businesses
hold onto overhead workers in hopes of future profitability.

The problem now is that firms are less committed to holding onto overhead
workers (employment relationships are more "flexible"). And the fall in
profitability that accompanies a recession would lead to mass lay-offs
and/or wage-cuts. The latter are more likely these days, again due to
increased "flexibility." ("Flexibility" seems a euphemism for "capitalist
power.")

> ...   A soft landing could be painful for workers for
>       other reasons. In recent years, corporations
>       have become obsessed with efficiency gains.
>       This mind-set could change management
>       behavior in a downturn, Mr. Paulsen argued.
>
>       "In the past, companies would cut capital
>       spending in an economic slowdown," he said.
>       "But capital spending has become efficiency
>       spending and companies may decide to
>       maintain capital expenditures this time and cut
>       the labor force instead."

I don't know what "efficiency spending" is. In any event, investment
spending is spending that businesses do in order to boost future profits.
In a recession, current cash flow and future profit expectations fall,
encouraging it to fall. This hurts employment in the capitals-goods sector
(which includes the computer-related industries).

> ...   The merger mania of recent years may also add
>       to greater-than-usual job losses in a slowdown.
>       From the mid-1970's to the mid- 1990's, Mr.
>       Paulsen said, there were 2,000 mergers and
>       acquisitions a year, on average. At today's
>       pace, 10,000 deals may be done in 2000. "If
>       you hit a slowdown," he said, "you're going to
>       find out that all these merged companies have
>       excess labor forces."

I guess the point is that mergers encourage rationalizations (ending of
"redundant" jobs, where the words rational and  redundant in defined in
terms of promoting profits) and that recessions speed up these
rationalizations.

>  ...  If consumers were in sounder financial shape,
>       the job losses that a slowdown might bring
>       would not be so worrisome. But installment
>       debt and stock market margin debt carried by
>       consumers are now an astounding 24.5 percent
>       of disposable personal income. From 1965 to
>       1995, this figure averaged 18.4 percent. It is off
>       the charts thanks to margin debt, which now
>       accounts for more than 3.5 percent of
>       disposable income, up from an average of 0.78
>       percent for the 30 years ended in 1995. This
>       debt load also means that consumer spending
>       could contract significantly, exacerbating the
>       downturn.

exactly!

>       Of course, a slowdown in the economy is not
>       yet certain. Although Mr. Paulsen expects
>       growth to average 2 percent in the next 12
>       months, others don't agree. (Portfolios, Etc.,
>       Page 8.)

right.

Jim Devine jdevine@xxxxxxx & http://bellarmine.lmu.edu/~JDevine