The Associated Press reports that the jobless rate hit 5% in December. If this trend continues, the odds of a recession -- two consecutive quarters of negative GDP growth -- increase dramatically.
The unemployment rate jumped from 4.7% in November to 5% in December, the highest since November 2005 after the Gulf Coast hurricanes dealt the country a mighty blow. Payrolls -- both private employers and government -- grew by just 18,000 last month, the worst showing since August 2003, when the economy suffered job losses as it struggled to recover from the 2001 recession.
70% of GDP growth is dependent on consumer spending. I have believed that despite wages that have been flat compared to the increase in prices of consumer goods, consumers would keep spending by taking out loans against their houses and on credit cards. But if consumers lost their jobs -- they would start to pull in their spending horns. And that would shrink the economy.
If companies start to fire employees -- as banks are already doing -- then we could be in for a mean recession.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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