Pessimism, Refreshed

Readers of this blog know that I have been skeptical of the recent enthusiasm, buoyed by a few scattered bits of positive data, about the prospects that the developed nations have entered a vigorous recovery.  I can only guess that human nature being what it is, people want to believe in renewed recovery and coming growth (otherwise how to get out of bed in the morning and look forward to the future?).  So they seize on any positive bits, minimize the negative, and bet on the future being bright.  That is a good thing, of course — it is what makes entrepreneurs take risks, what keeps banks and businesses investing.

Thus when the developed nations suffered an economic crash in 2008-2009 (which is still getting worse in southern Europe, even in 2013), the talk was all about how continued growth in the emerging market economies — China, India, Brazil, Turkey, and others — would propel the global economy forward regardless.  Today, after all the major emerging economies have seen sickening declines in their growth, most dropping by three to four percentage points from pre-2010 levels, the talk has reversed to how the rich countries, especially the US, are going to be the motors of the global economy, and the rich horses will pull the global cart and accelerate growth for the emerging countries later.

But what was this based on?  A few quarterly figures for positive growth in a few sectors (American auto sales are way up, yay!).  Was there any broad-based evidence of a recovery in employment, real wages, consumption, or credit?  No.  Corporate profits are up, but mainly because companies have kept sales constant but cut wages, replacing senior full-time employees with more junior and part-time workers and with automation.  So it seemed to me odd to expect every quarter to be significantly better for the entire economy when we seem stuck in a low-employment (“jobless?”) recovery.

Today’s news from the US Labor Department seems to confirm a pessimistic view.  The big news is not the headline number — although the 169,000 new jobs created in August is well below the 180,000 that most economists expected, and about half the 300,000 new jobs per month needed to start to restore employment to pre-2009 levels.  Unemployment did drop to 7.3%; but as with all other declines in the headline rate, this is mainly because more people dropped out of the workforce, unable to find jobs they wanted, and not because more people are at work.  Indeed, in today’s data, the percent of the adult labor force actively employed or seeking employment fell to the lowest level in 25 years (!!). 

Moreover, most of the new jobs created were in the low-paying retail and health care sectors (over half, at 82,200); jobs in higher-paying sectors such as construction and the information industry were flat or down.  Only 14,000 (less than 10%) of the new jobs were in manufacturing, which while positive is an OK number, but doesn’t indicate an expanding US manufacturing sector relative to the overall economy, as many who heralded a new boom in US manufacturing jobs had forecast.

Perhaps the most striking number, and the most troublesome for the Fed’s impending decision on how activist to be with QE this fall, is the sharp downward revision to the job figures for June and July.  June was revised downward slightly from 188,000 to 172,000, a revision of about 8.5%, a very normal adjustment in figures with large errors in initial estimates.  But July was revised down steeply, from 162,000 new jobs reported earlier to 104,000, losing nearly a third of the earlier job count.  This means that for the last six months, the average total job increase has been just 160,000 per month, practically within the margin of error of the 141,000 per month rate for the six months leading up to the Fed’s most recent, 3rd round launching of quantitative easing.  At this rate of job growth, given US population growth, according to the Daily Kos, “it would take until May of 2028 to return to the unemployment levels when the recession began in December 2007.”   That would be a 21-year period of stagnation in labor markets, dwarfing any economic slump in modern history.

And yet many analysts expect the Fed to continue with its plans to taper off bond-buying this Fall.  Simply the announcement of a planned taper sent interest rates skyrocketing, with the yield on the 10-year note doubling from 1.5% to 3% in the last year.  Will the Fed really start tapering and boosting interest rates further in light of these numbers?  Who knows? — given the stubborn foisting of austerity policies on crippled economies in Europe, it would be unwise to predict.  The Fed might feel that its credibility is on the line; it might point to some of the scattered signs of growth and stress that its mandate is both to maintain employment and prevent inflation, and say that some tapering is necessary in light of signs of growth in the overall economy, labor market be damned.

If I were at the Fed, I would look VERY CAREFULLY into the reasons for the downward revisions in job numbers in July.  How much were they due to  one-time statistical flukes, and how much to valid corrections of biased early estimates?  After all, if the August numbers later have to be revised downward as well, due to a similar early bias, the economy might actually be seriously slowing down, following those leading emerging market economies!  If in fact both the July and August job numbers turn out to be very low indeed, closer to 100,000 than 160,000 new jobs created, then to start tapering in September would be dealing a killing blow to an economy already staggering and on the way down — not something that history would judge kindly for a departing Fed leader.

So I am hopeful that Ben Bernanke, viewing the July revision, will wait at least one more month to start tapering, and insist on seeing the October revision of the August job number, before taking any new steps that could put further headwinds in the way of growth.  And if the October revision of todays number is downward, even dropping it below 150,000 jobs (the pattern in both the June and July revisions), then all talk of tapering should be dropped until we start to see at least three consecutive months with job creation closer to 200,000 jobs per month.

In a separate report from the CDC, the US birth rate was shown to have fallen to the “lowest rate on record since the government started tracking the fertility rate in 1909,” down about 10% from 2007 to 2012, and about half the rate during the baby boom.  The ‘good news’ in that report is that the rate of decline, fairly steep from 2007 to 2011, seems to have bottomed for the moment, with the 2012 birth rate almost the same as that of 2011.  Still, what this report tells us is that as births have been falling since 2007, we cannot expect there to be much in the way of new household formation, or families seeking to move to larger houses, to support the housing market in the coming years.

It looks like the Fed still has its work cut out for it — if the US economy, on a diet of powerful life-support in QE for the last few years, is still struggling to breathe strongly on its own, I would hate to see what happens if it is suddenly taken off the respirator!  Let’s hope the Fed changes course, or at least puts off action, so that we don’t have to see that.

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
This entry was posted in The Global Economy, U.S. Politics and tagged , , , . Bookmark the permalink.

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