, john hussman
in a typically canny letter reconsiders employment dynamics in the context of a widespread household deleveraging.
[I]t's a very negative signal that we've observed a decline in consumer spending over the past year – again – it's never happened before. The fact that it has in this instance suggests that consumers are anticipating a largely permanent downward adjustment in their overall spending ability. The lack of opportunity for continued mortgage equity withdrawals (a major source of consumer spending in recent years) explains part of that. The loss of investment and home values is another.
In typical recessions, unemployment tends to be a lagging indicator, and the employment figures themselves tend to move up and down roughly in concert with the overall economy. In the current downturn, however, the unusually high debt burden and precariousness of mortgages among households creates a dynamic that we don't usually observe. In the current cycle, as Ray Dalio of Bridgewater has correctly (in my view) pointed out, unemployment is likely to be a leading indicator of the economy. In an overleveraged economy, job losses can be expected to be followed by further delinquencies and mortgage foreclosures. While I don't expect that this will cause a violent feedback loop, I do believe that it is glib to assume that the employment markets and the U.S. economy are on a one-way track to improvement.
Labels: economics, markets