Radio commentary, November 28, 2009
Iceland, only about 80 degrees warmer? The latest sovereign financial crisis is Dubai, whose national holding company declared on Thursday that it needed to stop servicing its debts for a few months. (Wouldn’t it be nice if all of us could do that?)
Dubai is a small country, less than 1600 square miles, on the Persian Gulf. It is one of the seven members of the United Arab Emirates. Its population is only about a million and a half, three-quarters of them male, and less than a fifth are citizens. Most of the population consists of imported workers, mainly from South Asia. Although the basis of its wealth is oil, its worldwide reputation has come from Dubai World, its government-owned investment company. One of its subsidiaries attracted a lot of ugly attention back in 2006 when it tried to acquire some port operations in the U.S. Washington loves free trade and capital flows when it’s calling the shots, but if an Arab entity is involved, demogogues quickly invoke national security.
Back to the current crisis. The first thing that Dubai World isn’t going to pay is about $4 billion owed by its real estate subsidiary that’s due next week. Like many so-called sovereign wealth funds, Dubai’s went wild during the bubble, investing both in a domestic building boom and a foreign acqusition spree. Dubai’s binge was exceptional, however. It built three artificial islands off the coast of the country, and is in the midst of creating a 300-island archipelago off its shore as well. It bought, among other corporate assets, the Queen Elizabeth II (the ocean liner, not the monarch); the MGM Mirage in Las Vegas; The Union Square W Hotel in New York and the Fountainbleu Hotel in Miami; Barney’s, the high-end New York department store; a bunch of luxury golf and ski resorts; and a 20% stake in Cirque de Soleil, the Canadian circus, or performance art troupe, or whatever it is exactly.
Who’s going to take a hit on this? Mainly, it seems, European banks, though many are denying that they will. The amounts involved are far smaller than the trauma that the U.S. mortgage market inflicted on the world. But this is a reminder that the financial crisis is still with us, optimists’ longings to the contrary. Adding to the worries are concerns that Greece may have trouble servicing its government debt; its economy is a mess. I think we’re in for years of troubles.
I keep being struck by the continuing signs of economic trouble and the placidity of the political realm. In the U.S., despite an unemployment rate north of 10%—and likely to rise further before beginning a only painfully slow descent—the only disturbances are mainly coming from the teabaggy right, consumed as it is with delusions that Obama is turning the U.S. into a socialist state. If only.
Ah, returning to more familiar return, how’s this holiday shopping season going to be? Economic analysts always obsess over the results from Black Friday, the day after Thanksgiving, when the season traditionally begins (though I started seeing holiday promotions several weeks ago—and the Christmas lights are already up on some of the shopping streets around my neighborhood in Brooklyn). So far, retailers are looking scared, and have been very slow to do the usual November hiring. Early reports are that shoppers are out, but concentrating on necessities and bargains, with discounters in the lead, and luxury retailers only moving the cheaper stuff. What a change from a few years ago, when luxury, or at least aspirational, outlets like Tiffany were booming and Walmart was lagging. Now, Walmart is thriving as consumers trade down. Saks’s flagship store on Fifth Avenue in New York reported that people were buying deeply discounted Christmas ornaments and Godiva chocolates, but leaving the couture on the racks. It’s looking like only the deeply discounted stuff is moving.
This is all of more than immediate economic interest. Has this retail recession, the deepest in modern American history, changed the whole shopping culture in some structural way, or is it just a drawn-out cyclical affair? My guess is that something structural is going on, but you never know. At least I haven’t seen any reports of people being killed over $19 DVD players at doorbuster specials. Yet.
In other economic news, first-time claims for unemployment insurance, filed by those who’ve just lost their jobs, declined by 35,000 last week, and are now at their lowest level in nearly a year. And the count of those continuing to draw benefits, available only with a week’s delay, fell by 190,000 to its lowest level since March. The pace of layoffs continues to slow, but the rate of hiring has yet to increase.
Perspective on this can be obtained from a fairly obscure data series from the Bureau of Labor Statistics known as Business Employment Dynamics. The familiar monthly figures on job gains and losses are net results, the difference of a truly massive number of gross gains and losses. For example, in the first quarter of this year, we lost about 2.7 million jobs. But that loss was the result of 8.5 million jobs lost and 5.7 million gained. (That’s a little amazing: even at the nastiest spot in this recession, almost 6 million people got jobs. Of course, a lot more were losing them.) The losses were about 8% of total employment, and the gains, about 5%, a record low. But, amazingly, the loss rate is actually lower than it was in the 2001 recession. What’s really out of line is the low rate of gain. Even at the worst spot of that 2001 recession, gains were 2 percentage points higher. So the decline in claims for unemployment insurance has to be understood in this light: employers aren’t laying people off as harshly as they were early in the year. But there’s no sign that they’re about to start hiring in any quantity.