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Did Washington Save the Economy? Part 1


A "jobful" rebound is unlikely to goose the recovery.

It cannot be gainsaid that Wall Street economists are paid princely sums merely to primp their hair before each appearance on CNBC. As it happens, they've been busily inventing a "jobful" rebound scenario which holds that the severe depletion of private incomes highlighted above is soon to be reversed by a robust expansion of payrolls. The 300-400K pick-up that was whispered for March turned out to be a tad premature, but the impending return of jobs is a certain as the arriving birds of spring and will accommodate a smooth hand-off from public sector juice to self-sustaining private sector growth.

The unstated predicate of this jobful rebound is that, in fact, the bullish case was never wrong! It was only blindsided by a freakish financial heart attack that overwhelmed Wall Street in September 2008 when the authorities whiffed at the hour of Lehman's greatest need. Despite the ensuing short-lived contagion of panic that swept the financial precincts, the bulls assume implicitly -- and in some cases explicitly -- that the wider body economic suffered no lasting damage and is therefore capable of returning fully to its previous upward path.

During its brief stint in the emergency ward, however, Wall Street emitted signal errors that caused a severe overreaction on Main Street. It seems that everyday business people mistook the sweaty visage of Hank Paulson thrashing about the nation's capital warning that the sky was falling as evidence that a real crisis was at hand. In fact, the man was just trying to safeguard the financial system with some extra insurance wrap, albeit with an unfortunate exuberance of salesmanship. Consequently, companies panicked, throwing inventories, employees, and capital-spending plans overboard with reckless abandon. Soon the macro economy entered an unnecessary but self-fueling plunge which quickly morphed into the deepest slump in modern times.

But the slump wasn't real! It was a mistaken outburst of animal spirits -- a spasm of excessive retrenchment by millions of unnecessarily frightened producers and consumers. But now that the fevers have been quieted by Washington's massive regime of experimental medication, confidence is returning to Main Street. Indeed, comforted by near-term economic statistics which have been jigged-up by these fiscal and monetary drugs, the public will soon realize that last year's economic free-fall was an overreaction. In the event, Main Street will begin a compensatory round of spending for payrolls, inventories, consumables, and capital. The great whirligig of prosperity will then regain its self-propelled traction.

Call this the Phony Slump Theory and you have the current bull market case in a nutshell. There's only one oversized fly in the ointment. A diligent review of the nonfarm payroll reports for March -- along with those for the entire first quarter this year and the two-year recession that preceded it -- reveals no plausible evidence of a "firing spree." The staggering loss of 8.36 million jobs between December 2007 and December 2009 was actually less than proportionate to the decline of sales and output in virtually every category of the BLS series. For example, the job loss in residential construction was 30% compared to a 40% decline in new construction spending. Likewise, employment in retail dropped by 8% versus a 111% sales decline; the 30% decline in auto-plant jobs compared to a 44% drop in unit volume; and the 6% reduction in real estate employment was dwarfed by the 35% reduction in housing turnover.
No positions in stocks mentioned.

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