Today's Employment Report: A Key Recovery Indicator

Friday’s employment report provides a key indicator of economic recovery.

Monthly job losses must continue to fall to bolster confidence and consumer spending. In August, the economy shed 216,000 jobs, and the consensus forecast is for another 170,000 jobs lost in September. If job losses exceed 200,000, prospects for strong second half GDP growth will dim significantly.

Unemployment was 9.7 percent in August, is expected to rise to 9.8 percent in September, pierce 10 percent by yearend and stay there for a long time. Factoring in workers that have left the labor force and those working part-time who would prefer full-time jobs, the real unemployment rate exceeds 17 percent.

Since December 2007, the economy lost seven million jobs, and the economy has not added a single private sector job in the last decade.

Construction and manufacturing have lost 1.5 and 2.0 million jobs, placing particularly strong pressure on wages, household income, and consumer spending. As those industries pay ordinary workers the best wages, they are ground zero in the struggle to resurrect robust growth.

The economy contracted in the second quarter at a modest 0.7 percent, but should register positive GDP growth in the second half in the range of 0.5 to 2.0 percent.

Consumer spending, residential construction and technology sales have shown gains. Both the technology and materials sectors should benefit from stronger demand powered by growth in Asia.

Simply, China, with more effective stimulus and trade policies, is doing better than the United States and is holding up demand for U.S. industries. Also, U.S. multinationals producing and selling in China, like Caterpillar and GE will do well, even if their domestic operations and workers struggle.

The stimulus package should raise GDP by about 2.5 percentage points in 2010 and 2011 and add about 3 million jobs. However, most of those jobs will be temporary and not be enough to replace the more than 7 million that will be lost before the recession ends. The only truly strong job gains will be in government and government-related employment, such as health care and public works.

With productivity growing at least two percent a year and the working age population increasing one percent a year, GDP growth must exceed three percent to bring down unemployment.

Unless the Obama Administration addresses the structural problems that caused the recession—management issues at the banks and huge trade deficits on oil and with China—the recovery will not generate strong enough growth to bring down the unemployment rate.

Regional banks are now laboring under the weight of commercial real estate failures. Unable to effectively access money center capital markets, regional banks are short on funds to loan to small and medium sized businesses.

Ninety-five regional banks have failed, the FDIC is technically insolvent, hundreds more are in peril domestically, and $1.5 trillion in additional bank write downs is expected globally over the next two years.

These will significantly raise the cost of capital, unless central banks flood markets with liquidity and create inflationary dangers.

As the U.S. stimulus package pushes up government and consumer spending, the trade deficits on oil and with China will grow. This will tax aggregate demand for U.S. made goods and services and limit job gains.

Consequently, as the economy expands, businesses will struggle to find enough capital, and the trade deficits will create a shortage of demand for U.S. goods and services and new layoffs will begin once the stimulus spending ends.

President Obama is the proverbial whistler in the graveyard if he thinks a sustained economic recovery is assured.

Comments

[Denis Gould:]

7 million jobs lost. That's 7 million people in real distress. Unemployment close to 10% at the start of a multi-year period of economic consolidation. Japan has been in the economic doldrums for 20 years but today saw the unemployment rate fall to 5.5%.

There was a time in the late 1980s when Japan's economic philosophy was hailed as the great success story. We then decided it was bunk as the US grew (even if it was based on debt) and Japan stagnated. The wheel is about to turn full circle and once again Japanese policies - particularly with regard to employment - will be held up as role models in other countries.

Despite its long period without economic growth Japan remains a great place. I was there a few weeks ago and was once again struck by the efficiency, cleanliness and incredible politeness of the Japanese people. OK you can walk past a gas station and see two men in blue suits and two girls in pink ones waiting for a customer to come in (heaven only knows what they do to your car - I didn't like to hang around long enough to find out) but at least those four people are employed. The Anglo Saxon profit-at-all-cost-eve... mentality just isn't going to stand up in the new economic reality.

Oct 02 03:57 AM

[Moon Kil Woong:]

Denis: We are already emulating Japan in adding massive government debt we can't afford (much less than them) and QE with 0% interest rates. As with them, it put them into a 20 year rut with no way out of the nightmare. That is what happens when Keynsian theory is used in a non-keynsian way (stimulating yourself out of a economic rut makes sense stimulating at the first whiff of a downturn only slows the fall and drives your government into mass debt with nothing to show for it).

I do respect Japan for its efficiency and it's dedication for service. Likewise, I respect them for their high savings rate, commitment to live within their means, only accrue debt to buy property, and their low crime rate. Our society could learn a great deal from other countries. However, for some reason our leaders seem to be adopting the bad and avoiding the good.

Oct 02 04:53 AM

[Tony Petroski:]

From the author:

"Since December 2007, the economy lost seven million jobs, and the economy has not added a single private sector job in the last decade."

Professor Morici. Your heart is in the right place.

Tighten up your rhetoric.

Oct 02 09:21 AM

[MJJP:]

9.8 is actually lower than I thought would be published . However this will probably be ratcheted up next week so as to buffer the real impact. It is probably over 10% as we speak and calculated by their definition. The reality is that unemployement is really near 18% with untold numbers running out of unemployement compensation weekly and are not counted.

Oct 02 10:05 AM

[tripleblack:]

Beyond a certain point (and defining that point is the tricky part, I usually just read through the U.S. Constitution to get a clue) government jobs are parasitic on the larger economy.

Right now we should be shedding parasites, to protect the health of the whole herd, but are instead actively breeding them like mad.

Its become an exercise in macro-darwinism, which will happen first...

Will the herd awaken to the problem and start eliminating the parasites themselves?

Or...

Will the herd become so sick and diseased that the parasites start dropping off from lack of sustenance, leaving behind a much shrunken herd ill-equipped to face the rigors of survival in a carniverous world?

Oct 02 10:33 AM

[bottoms-up:]

I have an idea for Ben at the Fed and the Obama Administration:

After reading this item that many states, counties and families are too broke to bury the dead. Perhaps they should have something called the Corpse Corps, roughly modeled on the Peace Corps.

www.nydailynews.com/mo...

This is the reality of this country now my friends. The USA is quickly falling into Third World status while the clown on CNBC, CNNMoney, Bloomberg, the Fed, IMF, OECD and G-20 tell us it ain't so.

Oct 02 10:41 AM

[Windsun33:]

"..Unless the Obama Administration addresses the structural problems that caused the recession—management issues at the banks and huge trade deficits on oil and with China—the recovery will not generate strong enough growth to bring down the unemployment rate..."

And the administration seems clueless or maybe just in denial - either way, they seem to have no idea at all of what to do.

The one good thing that might come out of all this is that it may get rid of some of the overspending deadwood in Washington next election.

Oct 02 10:53 AM