jobs

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Jobs, Jobs, Jobs – Yea!

No not Steve, although it was good to see him turn up to Wednesday’s Apple announcement of the new iPad.

There is only one level of economic activity that most people care about. The rest is esoteric and distant. The one relevant question being: can I get a job?

Today we need to look at the government employment report, which told us that the economy added 192,000 jobs last month. Great. The gains were widespread across all industries, which belies the story we were hearing about structural unemployment being a growing concern. Were that true we would expect to see asymmetrical gains and losses across industry sectors, with the “old” industries still declining, and the “new” trying to add jobs. This would be more pronounced, presumably, in the wages paid in those industries actively seeking workers. The extra demand in those “new” industries would cause wages to spike as supply fell short of demand. It is that imbalance between supply and demand of appropriate labor that is referred to as the structural problem. There is little of no evidence to support that argument.

The big drag on the employment picture has now emerged to be the government sector. As all those austerity measures kick into gear we have shed about 377,000 government jobs – both Fed and state – since late 2008. This downward trend looks as if it will accelerate over the next few months and then into next year. This will bear down on the economy as all those wages are eliminated and drain spending power from the private sector. I doubt whether this drag will be sufficient to stall GDP growth, but it will assuredly reduce it.

OK so far so good. We are adding jobs across the board with just that one exception. The economy is in recovery at the level that really counts: it is allowing more people to make a living.

But.

I don’t want us to get excited by this. I want to remind you all that back only a decade or so ago the economy was routinely adding in excess of 200,000 jobs a month even in times of near full employment. That we are now approaching that, once, is not a cause for great celebration. That we have not motored well beyond and had a few months of 300,000 plus is extremely worrying. It is also the root of our ongoing problem.

So, yes, this is a relief. And, no, it is not great.

Like the boy in Oliver: “more please”

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Good News: Jobless Claims Drop

We should all acknowledge that today’s report is good news. New claims for unemployment assistance dropped again, to 368,000, which is 20,000 lower than last week. This is the best level they have been since may 2008. Better yet, the four week average is also down to mid-2008 levels at 388,500, which tells us that today’s report is not an aberration.

Claims have now dropped about 25% since last summer, and when we couple that advance with the modest rise in hiring and the reduction in layoffs, we can see the labor market has improved substantially.

Phew.

But.

Not enough. The crisis has left us with an enormous residue of damage yet to be cleared up. And the most obvious aspect of that damage remains the painful level of unemployment, especially long term unemployment.

We will get a better look at the job market tomorrow when the government reports it numbers, but earlier this week ADP reported that private payrolls gained 217,000 jobs last month. There has been a bit of a divergence between the ADP and government figures recently, largely because ADP counts payroll numbers and not those who were paid. If you are on a payroll somewhere, but received no wage, ADP reports you as employed. The government reports only those who get a wage. Apparently businesses are keeping people on their payroll lists and not paying them. Thus the difference between the two data series.

Setting that kind of statistical quirk aside, the numbers are improving. Nowhere near enough. But let’s bask in the glow for at least a day.

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Good Stuff? And The GOP Plan To Cut Jobs

There are a few interesting pieces of news to report today. My take on them is a little different, so here goes:

Manufacturing

We heard today that the Institute of Supply Management’s index of manufacturing activity rose yet again. It reached 61.4% in February, up from 60.8% in January, and is now at its highest level since 2004. This makes nineteen straight months of increase. Evidently things are looking good in our factories. Heck, they even added jobs consistently during 2010 making it the first year since 1997 when more factory jobs were added than lost. The only down note in the report is the news – actually not news at all – that raw material prices are rising right across industry and are putting some pressure on margins.

Even my perpetually sour outlook has to welcome this news. Except, of course, that it means little in general terms unless those employment figures accelerate much more quickly. Having busier factories on the back of extra overtime and only slight job gains does little to improve anything but profits.

Bernanke

Ben was chipper today as well. He fended off criticism of Fed monetary policy by arguing that any current inflation increases are likely to be temporary and are not a function of Fed activity, but reflect growth in demand overseas and political instability in the Middle East. While I am not a huge Bernanke fan, I have to agree with him on this. Inflation has picked up slightly, as we would expect when the economy awakens from its slumber, but there is enough slack in the system and no sign of rapid wage increases, so the long term trend is still very flat. This probably disappoints those whose ideology requires them to see inflationary ghosts under every Fed policy bed, but those folks are not driven by facts anyway. This is not to say that short term risks are not a worry: obviously ongoing turmoil in the Middle East is causing oil prices to jump around, and raw material costs are rising worldwide as demand grows. Plus food supplies are tight. Take all these together and the near term inflation outlook is for it to rise. But that is not a cause for the Fed to react by raising rates; and it also likely to abate later in the year as [if] things settle down again.

Construction Spending

There’s not much we can say: construction spending continues to tank. It fell 0.7% in January, which was much worse than expected – some had thought it would stay flat – but at least December’s dismal decline of -2.5% has now been revised to a less awful -1.6%. For these things we give thanks.

So what do we make of this?

Consistent with yesterday’s story I think these reports tell us the economy is chugging along at a decent enough pace. 2011 will definitely be a year of solid growth. The problem remains the enormous imbalance in the job market and the yawning inequality that is weighing down on our ability to accelerate. As long as the rewards of growth are asymmetrically channeled to the advantage of a small number of privileged people, and not broadly spread across all groups, spending and investment will reflect the median and not the mean increase. The intense clustering of wealth at one end of the economic spectrum deprives us of power to propel growth. The average may look great, but since most households are not sharing in that growth, the recovery will be slower to gain traction. Indeed it may well falter before it has healed the employment problem at all.

Which is why the current wave of anti-union activity or sentiment is so important. To the extent workers are deprived of their ability to extract wage increases from productivity gains through collective bargaining – which merely offsets the existent asymmetries in the workplace and does not introduce them – we can expect the scenario I just described to persist or worsen. Too many people seem to have forgotten how important the unions were in the creation of the middle class. Perhaps that is a sign of the union’s success and the complacency that resulted from that success. But it is indisputable that workers have not shared in the productivity boom of the last few years. Profits have garnered an historically large share.

Meanwhile, the Republicans are up in arms over the recent issue of several analyses of their budget cuts, all of which conclude those cuts will both slow the economy and cost jobs. I don’t see how anyone could argue otherwise. Cutting costs from government implies cutting demand and reducing government payrolls. That’s it. Plain and simple. The impact of the current set of budget cuts proposed by the GOP seems to be to reduce GDP by a minimum of 0.3% this year and 0.2% in 2012. It may be more. The cuts could also cost about 700,00o jobs over the next two years. Since the economy is creating a paltry 80,000 to 90,000 jobs a month, I will leave you to draw your own conclusions. The Republicans are busy undoing all the good work of the stimulus. Since they never believed in the stimulus I suppose they are blind to both its great success – just confirmed yet again by the Congressional Budget Office – and the negative effects of their policies.

Thank goodness the economy is growing fast enough to keep up a recovery despite their efforts. How long it can withstand the assault I don’t know. Bernanke was very evasive today when asked his opinion on the GOP cuts. Then again he’s a Republican. Even though they hate him.

Poor Ben. Stuck in the middle again.

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GDP Revised Down

Watch this space.

One of the reasons we all should ignore the puffery in the markets about the nature of the recovery is that the economy is still subject to significant risks. We all know and talk about the high level of unemployment, almost accepting it now as part of our near term fate. What we should be worrying about also is how that problem is about to be made worse by the fiscal crises at the state and local government level of the economy.

This is the most immediate lesson we can draw from today’s release of the revised fourth quarter 2010 GDP figures.

Recall that the original release had growth at a 3.2% annual rate. That’s the sort to platform from which we could reasonably expect growth to accelerate as household and corporate imbalances are worked off. Once expectations about the future improve, consumption and investment both should take off and propel us to higher growth for a while before we settle back down at a more sustainable rate. Indeed we have seen signs of confidence increasing and investment rising, making this typical recovery narrative very plausible. Which is why we see it stated so often in the media.

But.

Today’s revision should wake us up to the damage being wrought by the state level fiscal crisis. Yes, the revision includes a downward move for consumption – from 4.4% to 4.1%, but the big hit to growth comes from state government spending cuts. The original estimate of growth included only a -0.9% decline in state government spending. This release makes that decline much larger, at -2.4%. Therein lies the danger ahead. We are all aware of the enormous head of steam now building to slash government spending. That sounds very antiseptic when expressed in accounting terms. And balanced budgets sound very virtuous. But a cut in spending mean a cut in jobs. It means cuts in purchases from business, which, in turn, implies downstream cuts in jobs as well. Given the current mood, and the zeal of those intent on cutting spending, I think we can expect more of these negative numbers going forward. We are running a serious risk of undoing the good work done by the stimulus.

Enough said.

We should all revise down our projections for 2011. The cost cutters are at work.

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A Mixed Bag

The economic news this week has been a mixed bag. There is no news in the report that the National Association of Realtors is going to adjust its data – they have been giving us what appear to be wildly optimistic reports throughout the crisis. Neither should we be surprised about the slide in durable goods orders. Typically those orders lead the recovery and tend to taper off a bit once the economy is out of recession. But enough of that, here are the bits and pieces so far:

Housing

  • According to the Case-Shiller index home prices dipped slightly in December. The drop, 1.0%, was slight but significant because it tells us that there is no sign of a resurgence in housing. The more amusing news is that Karl Case and Robert Shiller interpret the news in different ways. Case is less pessimistic and suggests there is a “chance” we are at the bottom of prices. Shiller, however, is now talking of the “substantial possibility” that prices could drop another 15% or so. So which is it? Are we at the bottom? Or will prices drop some more? Who knows? Certainly not economists trained in the orthodox school. They are the ones who argue we cannot tell whether there is a bubble to begin with. I remain unconvinced that real estate has reached a true bottom.
  • Take, for instance, the low level of new home sales, which fell 12.6% in January and thus wiped out almost all the 15.7% gain in December. Most of us thought the December number was inflated by a last minute rush by buyers to take advantage of various tax breaks that expired at the end of the year. But the size of the drop in January is still quite disturbing. And how do we make sense of the last two months in the West where sales rocketed 62.5% in December only to collapse 36.5% in January? Yes there was a California tax break, but what is the trend? Is there a trend? Meanwhile January sales were up 54.5% in the Northeast, where the weather is often used to explain away odd winter dips in data, but surely cannot explain such a surge. Further: the inventory of unsold new homes is now down to 188,000 its lowest level since 1967. That hardly speaks to an optimistic view on the part of home builders.
  • In contrast, the sales of existing homes has edged up steadily in five of the last six months. Unfortunately it is this data series that is most untrustworthy since it is produced by the realtors themselves who, obviously, have an incentive to goose the numbers. This week’s report was accompanied by an explanation that sounds too good to be true: job growth, improving economic news, higher stock prices, and rising rents – everything but the kitchen sink – were given as reasons January’s 2.7% increase in sales. All of which may be true, but we should also note that prices dropped as well, by 3.7% to their lowest since 2002. Perhaps sales are up because prices are still weak?

Durable Goods:

  • Orders finally showed some life in January after being relatively weak the previous three months. Unfortunately the growth was almost entirely due to the sales of aircraft which is a wildly erratic sector because of the inherent ‘chunkiness’ of its order book. Take away the 27.6% increase in aircraft sales and the overall increase of 2.7% in January turns into a 3.6% drop. The year on year numbers are still quite strong: we are about 9.0% up in the last twelve months, but there are now signs that the initial post recession surge in capital goods sales is now giving way to a less robust trend. All of which is entirely normal, but which suggests that the economy has not much room for more above trend growth. By which I mean that the recovery, which looks as if it is producing GDP growth above the 3.0% trend line at the moment, is more likely to settle back than accelerate further. Again, this is normal, but we needed a much longer period of above trend growth to get unemployment down quickly. The durable goods data does not support the view of strong GDP growth continuing much beyond 2011.

Jobs

  • Today’s weekly report on new claims for unemployment assistance, tell us very little. Claims dropped to 391,000, which is 22,000 down from last week, but may still be unreliable because of weather and holiday reporting problems. That we are below 400,000 is a good sign. That we remain a way off the 350,00o upper boundary threshold used, as a rule of thumb, to designate a healthy job market is disappointing this far into a recovery. The numbers of people getting some form of unemployment benefit fell by over 89,000 last week, but this is an ambiguous figure. It might mean improvement as people no longer need aid. It might equally mean that people have simply exhausted their aid and are now exposed to the harsh realities of survival without it. My guess is that both factors are at play. The economy is adding a very low 83,000 jobs a month at the moment, which is way short of the numbers needed just to stay even with workforce growth. There is no need to keep repeating: our job generation record is just awful at the moment. There are signs of life and by mid-year things should be better, but I doubt we will reach the levels of growth needed to get us back to normal levels of unemployment any time soon.

One Last Thing:

I attended a Foreign Policy Association dinner last night and heard comments from a variety of what appear to be well entrenched establishment folks. All well meaning no doubt. The most interesting came from a leading figure from Singapore. He runs a huge sovereign investment fund and so pays a great deal of attention to the US economy, both short and long term. He saw good GDP growth this year and then some risks on the horizon. Amongst them he identified the risk of the US becoming less open. By which he meant less amenable to immigration which he sees as a demographic strength of the US and as a source of talent to drive the economy forward. He also expressed concern over our decaying infrastructure and the cost needed to catch up with worldwide standards of investment. Such a catch up will require funds to be diverted from other uses, one of which, health care, he also identified as a long term risk to growth. Lastly he also warned us about the state of our education system which is becoming enormously bifurcated. The best of our system is world class. The rest is well below average. Since it is the average education that forms the basis of the economy by providing the necessary talents in the workforce for us to compete, he sees our system as a net liability and not an asset.

This is an interesting point and slips over into the debate over health care as well. Americans are justifiably proud of their world class institutions, and their performance, in both academia and health care. They always refer to the outstanding results in those places as somehow justifying the entire system. But it doesn’t. The most important results are those the average American experiences. That is where the bulk of the population lives, and that is where the country falls short. Increasingly so. It is all well and good that a rich person can get world class health care and ensure a great education for their family. But if the rest of the nation cannot match that ability, the system is not doing its job. When judged by the average, and not simply the best, America is losing ground in both health care and education despite outspending everyone else by large amounts. In other words we waste a lot of money on an underperforming system. Fixing that is, of course, not easy. And it will be wrenching because it requires us to confront the failure of what we do now. The hard part is getting that failure articulated such that Americans can accept it. Unfortunately the only acceptance so far seems to be relentless attacks on our teachers, whom, by and large, are underpaid. I have heard very clever people argue we can solve the problem in education by firing the “bad” teachers, without offering an explanation as to how we identify such teachers, and how we replace them with better and presumably more motivated ones. I fear that all the current bad mouthing will simply drive out the good teachers who are tired of carrying the burden of the systemic failure, while leave us with the less able – those who have no alternative but to teach. We will certainly drive out the good once we start cutting benefits, pensions, and salaries.

Perhaps we all ought to rethink what we are doing before we add to the system’s problems by making it difficult to attract the talent we need to teach our children.

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