What to Look for in Friday's Jobs Report

by: Peter Morici

Friday, the Labor Department will report employment data for October. In September, the economy lost 159,000 jobs, and the consensus forecast is for another 200,000 jobs lost in October.  My forecast is for a 170,000 loss.

From December through September, the economy lost 760,000 jobs. Manufacturing and construction shed 392,000 and 340,000 jobs, respectively, and in recent months, layoffs spread to finance and retail sales.

For President-Elect Barack Obama's appointing of a Treasury Secretary to tackle the banking and housing crises is the most urgent priority; however, if the economy continues to bleed jobs in early 2009, voters will quickly become uneasy with his populist economic agenda if he does not reverse that problem. Tax cuts provide a nice pop to take home pay, but pale in comparison to the improvements in living standards provided by good paying jobs, something the economy just could not provide in large enough numbers under President Bush.

An infrastructure-focused stimulus package, rather than more tax rebates, can provide some quality jobs quickly and limit the depth of the recession. As a next step, President-Elect Obama must tackle the trade deficit and foreign borrowing, which are destroying good paying jobs in America. These same problems caused, and will cause again if not addressed, hyper-lending, another asset boom and then a credit crisis and deeper recession. That puts the trade deficit and foreign borrowing to finance at the top of the list after a Treasury Secretary and stimulus package.

Trade with China and oil imports account for 90 plus percent of the trade deficit. These require that Americans borrow $50 billion abroad through foreign private and government purchases of U.S. Treasury, corporate and mortgage-backed bonds to finance the deficit. Along with lax banking practices, these foreign capital inflows, compelled by the trade deficit, created the easy credit environment that caused the housing bubble.  Reflating the economy through huge government spending and budget deficits, without addressing trade with China and oil imports, would not create enough good paying jobs to reverse the downward slide in workers wages.

To stop the destruction of good paying jobs, Obama must push through an infrastructure-focused stimulus package to soften the impact of the recession and stem jobs losses, and at the same time, he must fashion policies to reduce oil dependence and fix trade with China.

In Friday's jobs report the key variables to watch are:

Jobs Creation.  October 3, the Labor Department reported the economy lost 159,000 payroll jobs in September and shed an average of 84,000 jobs each month since December. The consensus forecast is that the economy lost 200,000 jobs in October. My published forecast is for a 170,000 decrease in employment.

The economy continued to expand during the first half of 2008, but productivity rose faster than demand for goods and services, thanks to the devastating impacts of higher gas prices on consumer buying power and automobile purchases, subsidized Chinese imports on employment in U.S. manufacturing, and the banking and housing crises on construction activity.

In the third quarter, GDP contracted. Preliminary estimates indicate GDP fell at a 0.3 percent annual rate, but this figure is likely to be revised upward. The contraction in GDP is likely to be accelerating in the fourth quarter. Job losses averaging more than 100,000 per month are likely to continue into 2009.

Unemployment. In September, the unemployment rate, as computed by the Labor Department, was 6.1 percent, and is expected to rise to 6.3 percent for October.

Since President Bush took office, more adults have chosen not to seek employment owing to worsening labor market conditions. If labor force participation today were at the same level as when President Bush took the helm, the unemployment rate would be about 7.9 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count when computing the unemployment rate.

Business vs. Government Payrolls. In September, government employment expanded by 9,000, even as overall payroll jobs contracted 159,000. This indicates the private business economy shed 168,000 jobs. Failing tax revenues are crimping state and local budgets, and some state and municipal governments are now beginning to trim payrolls.

Construction.  In September, construction lost 35,000 jobs, and manufacturing lost 51,000 jobs.

Residential construction shed nearly 11,000 jobs, while 24,000 jobs were lost in nonresidential buildings, roads and other infrastructure projects. This has been a persistent pattern for many months. Notably, since residential construction employment peaked in September 2006, that sector has lost 172,000 jobs, while the balance of the construction industry lost 400,000 jobs.

Those losses indicate the housing recession, credit crisis, high oil prices, and China trade deficit are infecting the long-term growth prospects of the entire U.S. economy. American businesses are simply not hiring or building for the future in the United States, and this bodes poorly for GDP growth in the second half of 2008 and beyond.

Retailing. Retail trade has shed 276,000 jobs since November 2007, and lost 41,000 jobs in September and 25,000 jobs in August.

Finance and Insurance. During the economic expansion finance and insurance, along with technology sectors offered some of the best new job opportunities, outside of health care and technology-related activities. Since May, finance and insurance shed 36,000 jobs, and 9,000 in September alone.

It's not just the U.S. credit crisis. U.S. financial services are facing tougher competition in booming markets, like the Persian Gulf, where the U.S. credit meltdown has tarnished the image of U.S. service providers like Citigroup (NYSE:C). Increasingly U.S. investment banking firms cannot demand premium high prices for their services, as sophisticated buyers prefer local, more reasonably-priced and less-tarnished competitors.

Manufacturing. Over the last 102 months manufacturing has lost 3.9 million jobs. The dollar remains overvalued against the Chinese yuan and other Asian currencies, and the large trade deficit with China and other Asian exporters is a key factor pushing down U.S. manufacturing employment.

To keep the value of the yuan low against the dollar policy, the Chinese government intervenes in currency markets, selling yuan for dollars and other Western currencies at a discount from a market determined price. In 2008, this intervention is nearly $700 billion, or about 18 percent of China's GDP and 46 percent of its exports of goods and services. These purchases provide foreign consumers with $4.7 trillion yuan to purchase Chinese exports, and create a 46 percent "off budget" subsidy on foreign sales of Chinese goods and services.

Many U.S. manufacturers find it easier to locate production in China and other Asian locations than add jobs in the United States to produce goods. U.S.-made goods must scale considerable trade barriers and compete against subsidies provided by undervalued currencies in China, India and elsewhere in Asia and regulated fuel prices.

U.S. manufacturers have received little encouragement from the Bush Administration, and in particular Treasury Secretary Henry Paulson, that it will do much to level the playing field in Asia.

Were the trade deficit cut in half, manufacturing would recoup at least 2 million of the 3.9 million jobs lost since 2000. U.S. GDP growth would be in the range of 3.5 to 4.0 percent a year instead of 2.5 to 3 percent expected as the economy resumes growth the latter half of 2009. Real wages would rise briskly.