Deflationary Depression Returns To Haunt America

David Rosenberg, North American Economist at Merrill Lynch is talking about a "Depression-Style Jobs Report"

We cannot rule out the loss of 1 million jobs in March
Judging by the leading indicators – 600,000+ jobless claims, Challenger layoffs up an eye-popping 158% from a year ago, the 78,000 plunge in temporary employment, the record-low workweek – suggest that we will have to endure an 800,000 employment slide when the March data roll out, and a 1 million loss cannot be ruled out. We may have to redefine yet again what a ‘new normal’ is at that point. The bottom line is that a recovery in domestic economic activity is, at best, a late-2009 story, but at this stage, even that could be a fairy tale.

One in seven individuals unemployed or underemployed
Suffice it to say that the unemployment rate that is most inclusive in terms of accounting for all forms of “underemployment” such as this shift toward part-time and away from full-time work is the U-6 measure, which soared from 13.9% in January to 14.8% in February, a record high for this particular series. So, we have a situation where not only 1 in 11 homeowners with a mortgage are now either delinquent or in the foreclosure process, but we also have 1 in 7 individuals who are either unemployed or underemployed. We’re not sure how to classify
such a macroeconomic backdrop, but it certainly is not a garden-variety recession.

How we get any sustained inflation is totally beyond us
In addition to credit contraction, asset deflation, profit compression and employment destruction, we are also in a vicious inventory reduction phase in the manufacturing sector. If our forecast is correct, this would then suggest that the capacity utilization rate in manufacturing will make a new all-time low of 66.6% from 68% in January. The employment data also tell us that there is a very high probability that wages and salaries deflated -0.3% in February as well. How we end up getting any sustained inflation pressure, or backup in bond yields for that matter, as the economy moves further and further away from any semblance of “full employment” in either the labor or product market, is totally beyond us.

Putting the reflation-deflation debate into perspective
Yes, the Fed’s balance sheet and the balance sheet of the federal government are expanding at record rates. But these reflationary efforts should be seen as a partial antidote, not a panacea, to the deflationary effects brought on from the unprecedented contraction in the largest balance sheet on the planet: The $55 trillion US household balance sheet. Based on what house prices and equity valuation have been doing this quarter, we are likely in for a total loss of household net worth approximating $7 trillion this quarter alone, which would bring the cumulative decline in consumer wealth to $20 trillion. This wealth loss exceeds the combined expansion of the Fed’s and government balance sheet by a factor of ten. That should put the reflation-deflation debate into perspective.