Job market is awful, but may get worse

Economists already have begun comparing the current downturn to the back-to-back recessions of 1980-1982. The unemployment rate peaked at 10.8 percent then after the government pushed interest rates to high double-digits to try to break a decadelong inflationary spiral.

“You had interest rates that soared, the credit system shut down, and everything stopped,” said Barbera. “That's what this (jobs) number says, and that's what it suggests for the GDP numbers."

Before Friday’s jobs data, economists had expected GDP to contract at a sharp 4 to 5 percent rate in the current fourth quarter. Barbera said the latest data indicated the drop could be more like 8 percent.

“We're in a deep contraction with very little offset now,” said former Treasury Secretary John Snow. “The consumer is parked. China is slowing. India's slowing — Brazil, Mexico. Virtually every sector of the American economy is being affected.”

To some observers, the current economy is in even worse shape than the early 1980s recession that was brought on by the government-induced credit squeeze. Once the government cut rates, the economy recovered quickly.

Now the government has so far been unable to halt the steep decline, despite the commitment of trillions of dollars in spending, investment and loan guarantees.

The current credit drought follows the excesses of a prolonged period of low interest rates and easy-money lending that began to reverse course in 2007 and all but shut down lending in mid-September. To spur borrowing, the Federal Reserve has cut the target overnight lending rate to 1 percent and is expected to cut by as much as a half-percentage point on Dec. 16. But short term market rates have been well below the Fed’s official target for weeks.

With short-term rates approaching zero, the Treasury and the Fed are considering other measures to try to drive down the cost of long-term borrowing, including mortgage rates.

President-elect Barack Obama already has called for a half-trillion-dollar government spending package to generate 2.5 million jobs over his first two years in office, which Congress is hoping to have ready by Inauguration Day in January. The latest data may prompt enactment of an even bigger spending package.

“We had assumed a $550 billion package over three years — we will need more than that,” said Gault. “The trick will be making the stimulus effective quickly, which is difficult since infrastructure projects take time to gear up.”

Regardless of the size of the package, Friday’s jobs report heightens the urgency of an aggressive government response, said Mark Zandi, an economist at Moodys’ Economy.com.

“The only way out is for government to be extremely aggressive on every front — the Federal Reserve, economic stimulus, help for the automakers, extending out TARP money (to buy bad assets from banks) — everything,” he said.  “Because we're now in this self-reinforcing, negative cycle, and the only way out is for the government to fill the void.”

Even if the government acts quickly and stems the slide in the financial markets and the economy, some economists believe the jobless rate will top 10 percent before beginning to subside.  If this recession drags on past mid-2009, it would be the longest since the Great Depression. (The recessions of 1973-75 and 1981-82 both lasted 16 months according to the National Bureau of Economic Research.)

In any case, the eventual recovery will likely be more gradual and weaker than after past recessions, according to Stuart Hoffman, chief economist at PNC Financial.

“I think the mind-set will be different on the other side of this recession over the next couple of years,” he said. “That will prevent borrowers and would-be borrowers and lenders from saying, “Alright, game’s back on. Let’s start running house prices up and credit cards and credit limits up. It’s not going to happen.”

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