Not So Happy New Year: U.S. Economy on the Edge of a Recession

by Adam Price |
January 11, 2008
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San Jose, CA - New economic data released in early January 2008 showed that the U.S. economy was on the edge of a recession in December. On Jan. 2, the Institute for Supply Management reported that the manufacturing sector shrank in December. Their index fell to 47.7 from 50.8 in November, the lowest level since April of 2003. Then on Jan. 4, the Department of Labor said that the unemployment rate rose to 5% in December, from 4.7% the month before, the biggest one-month jump since the last recession in 2001. In the same report, the Labor Department also said that only 18,000 new jobs were created in December, the weakest number since August of 2003.

In addition to jump in unemployment, there was also another increase in the number of workers who are working less than full-time. In December, there were 3.1 million part-time workers due to slack business conditions, up almost 20% from December of 2006. These workers are not counted in the official unemployment statistics, but workers facing shorter hours feel the pain of smaller paychecks and sometimes loss of part or all of their benefits. Increases in the number of part-time workers due to a slower economy often foreshadows more layoffs down the road, as businesses often try to cut workers’ hours before cutting their jobs completely.

The jump in unemployment hit African Americans and Latinos especially hard. While the unemployment rate for white workers rose 0.2%, from 4.2% to 4.4%, the unemployment rate rose three times as fast, or 0.6% for Blacks and Latinos, to 9.0% and 6.3% respectively. African American teenagers were hit especially hard, with a 5% jump in the unemployment rate, from 29.7% in November to 34.7% in December. In contrast, the unemployment rate for white teenagers was less than half as much, and actually fell slightly from November to December.

Recessions in the United States typically develop in three stages. The first stage is when overproduction of either new homes (as in the last two years) and/or business buildings and machinery (which happened before the last recession in 2001) starts to drag on the economy. The second stage is when the slowdown spreads to other sectors, leading to lower corporate profits and then less hiring and more layoffs. The point where the total number of jobs starts to shrink has traditionally marked the official beginning of a recession. The third stage is when the falling number of jobs leads households to cut back on consumer purchases and falling tax revenues lead to cuts in state and local government spending, marking a full-blown recession, with rising inventories of unsold goods going hand-in-hand with growing numbers of jobless workers and cuts in schools, libraries and other government services.

While the rate of price increases, or inflation, tends to fall in most recessions as businesses find it harder to raise prices, this is not always the case. During the 1970s, there were times of ‘stagflation,’ where a recession was combined with rising inflation. While many blame this on the price of oil, even more important was the falling value of U.S. dollar, which made imports of all kinds, not just oil, more expensive. With the dollar falling and record amounts of imports, it is no surprise that price increases have been coming faster and faster, squeezing workers’ purchasing power just as unemployment is rising.
During almost all past recessions, households have cut back on borrowing for consumer purchases. With household debt at near-record levels and with banks less and less willing to lend due to rising defaults on home mortgages, this is likely to happen again in the next recession. But the impact on the economy and on household standards of living could be much worse than usual because more and more workers have already turned to borrowing to pay for health care, food, transportation and other necessities.

Corporations and their politicians have also whittled down the power of labor unions and the social safety net that once provided more protection during recessions. In 2006, only 13.1% of workers were represented by labor unions, less than half of the rate in the 1970s. At the same time, today only about one in three unemployed workers are collecting unemployment benefits, because of changes in the law and in corporate hiring that makes it more difficult for jobless workers to collect benefits.

The coming year will be challenging for working people. Corporations are stepping up layoffs while cutting back on hiring, while maintaining the perks and privileges of their executives. California’s Republican governor is preparing for a 10% across the board spending cut that will mainly affect schools, health care and welfare, while vowing to keep tax cuts for the well-to-do. Renters are being evicted from foreclosed houses while record numbers of homes stand empty. More and more children will be losing their health insurance as their parents are laid off, while the Bush administration refuses to expand health care for children, while spending billions on the wars in Iraq and Afghanistan. This contrast between working people and the rich, between human needs and corporate profits, and between politicians’ claims to be “for the people” and their anti-people actions, are part and parcel of a capitalist system. Just changing the party in power in Washington, D.C. is not enough. What is needed is a grassroots fight back to make the rich pay and to hold the politicians accountable to the people.