Monday, January 7, 2008

Will The Recession Be Outsourced?

So, US consumption growth will decline - that much is clear. Indeed, in the short term consumption is likely to contract in real terms.

The quandary now is how much of that reduction in consumption will raise unemployment in the US. Traditionally, declines in consumption translate into declines in manufacturing employment. Yet, these days a smaller and smaller fraction of the US population is employed in manufacturing.

Can manufacturing still cause a recession when it employs only 10% of the workforce? Will the declines in employment cut deeply into the traditionally stable service sector? Or will the recession be outsourced? That is, will the decline in manufacturing jobs that typically accompanies a US recession really hit manufacturing employment in other countries.

My intuitive take is that the service sector will take an unprecedented hit but that much of the increase in unemployment will be exported. My pet theory is that we are moving into a strange world of recessions without large increases in unemployment.

The pain of the recession will be felt in asset declines, and workforce relocation. Workers will slide into lower paying less productive jobs but not on to the unemployment rolls. These working recessions will see declines in productivity and an evisceration of corporate profits.

But thats just a pet theory. Time will tell.

15 comments:

dWj said...

Some Wall Street economists are suggesting that employers have been unusually "disciplined" about hiring in this expansion, and may therefore be able to avoid laying off as many people as they historically have if their business goes down.

And with the dollar having dropped so much, even as the trade deficit has already started to come in, it seems there may be a good case for what you say: foreign consumption of US products will further shelter US employees from the hit they might historically have taken under similar domestic consumption conditions.

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