The Ties That Bind: Unemployment and Housing

November 8, 2008

Two news items were released on Friday that would seem to bode poorly for the state of the real economy. One of these was the report on unemployment rates, which has now shot up to approximately 6.5%. That figure happens to be the highest since 1994, which curiously represented a turning point for the American economy. While that number is not astoundingly high in itself, when we look at the factors which comprise it, 6.5% becomes slightly more alarming. 247,000 manufacturing, construction, and service-providing full-time jobs were lost. We also have to bear in mind that these are the official numbers reported by the government, which are of course configured to appear far more optimistic to the casual observer.

My opinion is that real unemployment stands at 7.5%, with the figure coming from this table from Mish’s Global Economic Trend Analysis below. but regardless of which number you believe to be truly accurate, it would be tough for anyone to disagree with the fact that the real economy continues to stumble. Last months unemployment figures were also revised upwards by 125,000 jobs, putting total job losses at about half a million in two months.

The second piece of news, far more ominous in its implication, is the staggering quarterly loss and cash burn rate reported by General Motors on Friday. GM is essentially hemorrhaging cash at this point, posting a loss of $2.5 billion, while spending $6.9 billion. It doesn’t take a genius to figure out that those figures are a bit problematic. The company has gone so far as to acknowledge that its pockets will be empty by the beginning of 2009 unless something is done to recapitalize it, hinting at an additional $25 billion, which would be coming on top of the current $25 billion loan that has yet to be disbursed. Ford’s cash burn rate is equally substantial, and Chrysler looks to be just as poorly positioned as the aforementioned.

Why is this news so dire? For many of us keeping an eye on the economy, the key to recovery has been identified as the housing market. Even though activity has been stirring in the housing market of late, the simple fact is that as people continue to lose jobs, it becomes difficult to make housing payments even in the best of times. When your house is mortgaged for more than it is worth, and your interest rates are suddenly adjusted higher, that makes the situation even worse. As this continues to happen at a national level, money will continue to simply disappear.

Now let’s bring the automakers into the discussion. Anyone who has seen Michael Moore’s “Roger & Me” can attest to the intense, immediate impoverishment that a closing auto plant can wreak on a local economy. Regardless of what you or I may think of his politics, the scenes of dilapidated houses and boarded-up shops are viscerally evocative of our deepest sympathies. A bankruptcy of the Big Three would cause a ripple effect not only in local economies, but nationwide. The downward spiral of the housing market, and therefore the economy at-large, would continue. Other automakers will fill the gaps in the market left by the Big Three, but even if that took only a year (a highly optimistic estimation), the effects would be devastating.

It’s important to consider that while we rail against large corporations, they employ, and support the lives of everyday, responsible, hard-working people, people who could foreseeably lose their homes. These are not sub-prime homeowners who were suckered into something they could not afford by the allure of the housing bubble. These are victims of mismanaged and outdated corporations. I am not a proponent of the government giving aid to corporations, but when it comes to retaining working-class jobs, our government is required to preserve the well-being of its citizens. If that means lending additional money to the Detroit, our policymakers need to attach some strings that emphasize a change in production emphasis. The same would apply if the government decided to allow the Big Three to have access to the $700 billion bailout package. Automakers should be forced to anticipate future demand for new types of efficient, green vehicles, rather than current demand for gasoline-fueled cars.

By doing so, the government would be killing two birds with one stone, and could avoid a potentially catastrophic acceleration of job-losses. These are the sorts of crises that Keynesian economics are meant to deal with, not those that involve providing corporate welfare. It certainly won’t save the housing industry, but it well prevent the bottom from falling out. We can only hope that the government is aware of the severity of the situation.

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