unemployment

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Jobs and Services: Our Crab Economy?

I am running out of ways to describe our economy. So today I am calling it a crab economy because it is still wandering about sideways. Today’s reports both support this view.

First: employment.

The monthly report from ADP, the payroll processing business, tells us that the private sector added 162,000 jobs in September. This is entirely consistent with what we’ve been seeing, and is nowhere near good enough. Still we ought not to begrudge progress albeit it pathetic. It’s better than the alternative. It is a little troubling, but not too surprising, to see the prior two months be downgraded by a combined 29,000 jobs. Unsurprising because data is always being updated in light of better information, and all the signs over the summer were that the economy sputtered a bit. So any revision was likely to be downwards not upwards.

Thus far in 2012 the private sector has added about 171,000 jobs a month, up from 2011’s 138,000 average. So progress has been made. The problem, as we all now know, is that this progress is insufficient to bring down unemployment when the population is growing almost as quickly.

The service sector has been a little more robust than manufacturing in recent months, so it is not surprising to read that 144,000 of the total new jobs in September came in the services.

Which brings us to today’s second major report: the Institute of Supply Management’s index of activity in service industries. The index rose again in September, reaching a six month high of 55.1%, up from 53.7% in August and is the thirty-third straight month marking expansion rather than contraction [any reading over 50% suggests expansion]. Service industries tend to be more local and thus not as susceptible as manufacturing to global business conditions, so the sector has been a more reliable source of growth than manufacturing for some time. Also, service businesses employ about 80% of all workers, meaning that trends in that sector are vital to the overall health of the economy. Nonetheless services are not immune to bumps in the trend: the ISM index reached this same level in February before flattening out and dropping slightly – but still hovering above the expansionary 50% mark – for a while. This month suggests a repeat of that pattern is in store. The report suggests that future hiring will lessen and thus drag the index down a little later this year or early next.

Neither of theses reports forces us to alter our view of the economy. It is still wallowing about. It is still recovering slowly. It is still in need of a boost. It is moving more sideways than up. Hence the crab analogy.

One last thing: the ADP numbers recently have been slightly higher than the government’s job report due to the steady loss of government jobs at the state and local level. So today’s ADP report of 162,000 new private sector jobs suggests an overall growth of between 120,000 and 140,000 new jobs. Not good enough by far. But better than nothing.

 

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Here We Go A-Wallowing

This is what floundering looks like. Well, perhaps I am being a bit harsh. After all we had a couple of good reports earlier this week, and today’s news on new claims for unemployment assistance is fairly decent. But the final revision of second quarter GDP and the durable goods data confirm that the economy is best described as being a doggie paddle swim rather than a free-stroke. There’s a lot of splashing but not a lot of movement.

The second quarter saw GDP rise a paltry annualized 1.3%. That’s nowhere near good enough to resolve our employment problems and leaves us very vulnerable to the twin impending crises of the Euro’s ongoing unravelling and our own self-inflicted budget impasse. We have precious few degrees of freedom which means that everything needs to go well – which I doubt they will – if we are to avoid even slower growth in upcoming quarters.

Recall that the last estimate for second quarter GDP was 1.7%, so the final tally represents more pessimistic view and confirms what we all felt about the midsummer: we became becalmed. This is especially downbeat because the two major factors contributing to the downward revision are exactly those we are hoping will drive us into a more rapid recovery. Personal consumption growth was revised down from 1.7% to 1.5%; and business investment growth was revised down from 4.2% to 3.6%. Since the other two components of GDP, trade and government spending, are both either relatively flat and/or highly dependent on the impending crises I mentioned earlier, we are dependent on the private sector to fuel the recovery. And the private sector is still wallowing in the aftermath of its bubble induced, debt retrenchment.

This is, of course, not news, but today’s news is a vivid reminder of how much work is yet to be done. No amount of political sharp talk can mask the failure of economic policy over the past decade – or more depending on how meticulous you want to be in tracing back the causes of our problems.

There is no point in re-hashing the discussion: we suffer from a lack of demand, and the longer we fail to address that issue the longer our wallowing will continue.

Today’s durable goods order report was decidedly different from most expectations. August’s 13.2% decline was much steeper than anyone predicted. It is, however, a very distorted number. Durable goods orders are highly volatile because they include some very large items such as aircraft orders and defense spending on capital goods. For instance, aircraft orders fell a whopping 102% in August alone because airlines had bunched their orders up during the Paris Air Show producing a spike up in July of 51%. Stripping out the effects of those two categories leaves us with a very different impression: the other categories actually grew slightly, at an annualized rate of 1.1%,reversing the declines of 5.2% in July and 2.7% in June.

I think it is fair to expect a slight pause in business investment, as illustrated in durable goods orders, while companies assess the likely damage to demand resulting from the upcoming, post-election, negotiations over the Federal budget. Failure to re-work the current arrangement would send us over the proverbial fiscal ‘cliff’ and by most accounts produce an immediate recession. Congressional failure to reach an agreement over the budget is injecting a level of uncertainty that inhibits growth. As you know, my opinion is that we ought to be augmenting not diminishing demand, but that is not the prevalent view in Washington where austerity in some form appears to be the more likely outcome. We are paying a heavy price for the impasse in Washington, and every quarter that goes by without a sensible long term budget in place adds to the pain.

Finally a little good news: today’s report on weekly claims for unemployment assistance was a modest step in the right direction. At 359,000 it was 26,000 down on the prior week and managed to produce a slight 4,000 improvement in its four week moving average. So that’s the good news. Unfortunately that four week average is almost spot on where it has lingered all year, and is woefully above a rate consistent with a rapid recovery in employment. While supporters of Obama will no doubt crow that this is much better than we saw at the depths of crisis – true – and is better than the record of the Bush administration -also true – it is nothing to be proud of. We are generating jobs at about the same rate the population is growing. That is insufficient and speaks to rotten economic policy in the face of a human crisis that everyone in Washington pays lip service to, but substantially ignores.

Of course it would help if economists could agree on what a good policy would be, but that, I fear, is a pipe dream. But, come to think of it, most economic theory is a pipe dream anyway, so why should we expect economists to be of value in fixing an economy?

Of that, another time.

 

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The Fed Acts

Well it had to sometime. No one else is doing anything.

Only a few days ago I expressed a certain dismay that Ben Bernanke said a lot of the right things in his Jackson Hole speech, but then had done nothing. He articulated exactly why the Fed ought to act, and act aggressively, and then fell silent. It looks as if he was waiting for one more rotten employment report before he could gird himself for the fight.

And he saw that report last week. With the economy’s abysmal not very good job creation lingering, as evidenced by last week’s paltry increase in payrolls, time had run out. It took a while for the Fed to realize that it has two policy objectives and not one. The first – battling inflation – has so dominated Fed thinking that the second – helping maintain full employment – scarcely gets a look in. Typical of central bankers everywhere the Fed has become a slave to low inflation. Even when that means damaging the employment outlook.

Targeting inflation has its merits. Price stability, after all, has a lot going for it. And there are times when hammering inflation is worth the short term loss of jobs that seems inevitably to accompany the necessary disinflating. Nonetheless the obverse must also be true. There are times when letting inflation creep up is worth the boost to employment. In other words the trade off between employment and inflation is an active and ongoing compromise working in both directions. We seem to have forgotten that. So with our central bankers obsessed by inflation the unemployed were thrown on the mercy of fiscal policy, which as we know is so politically fraught as to be nonexistent much of the time – Obama’s way-too-weak stimulus notwithstanding.

Today that changed somewhat.

The new round of monetary policy – called QE3 – is remarkable in a couple of key respects.

First, it is open ended. The Fed has set no specific timetable for its purchases, saying only that it will monitor trends and keep up its action as long as necessary.

Second, it is going to focus its purchases on mortgage backed securities rather than Treasuries. According to Bernanke this is in order to bolster the real estate market, and to provide support at that end of the risk spectrum.

Oh, one more thing, the Fed also extended its low interest rate target period by a further six months. This means it is not expecting to raise rates until mid-2015. This extension alone is depressing. It implies that the Fed sees high unemployment persisting for a long while yet. Perhaps more intriguing was the comment that the Fed intends to keep low rates even after the recovery gathers steam. So we ought not to experience the usual rough tightening that central bankers love to impose the moment they see growth. This time the Fed is committed to allowing growth to build momentum before reacting. At least that’s the story for now.

So. What does this mean?

I think I am on the cautious side with this. In an economy going through a debt reduction of the scale we are, lowering interest rates is a more blunt tool than under normal circumstances. Plus the lack of demand is the driver of low business investment, not the cost of borrowing. So with households still gun shy over taking on more debt, and with businesses skeptical about the need to expand operations, the stimulative impact of cheaper money is lessened.

Having said that, with fiscal policy contorted and neutralized by our political impasse, the Fed’s action is the best we can hope for in the near term. So we ought to applaud and keep our fingers crossed. One of our two doctors noticed our malaise. Unfortunately the wrong one. Better that than nothing.

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Weak Sales

The economy has clearly hit a weak patch. Today’s report on retail sales has them falling 0.5% in June. Not only is this much worse than most people had expected – the par expectation seems to have been for growth of around 0.2% – but it means that sales have fallen for three straight months. The last time we had three consecutive declines was in 2008 during the recession.

Obviously this is not a good thing.

The only upbeat aspect of the report is that gasoline sales fell reflecting the recent drop in oil prices. Consumers will benefit from this, but they show no inclination to spend what they save at the pump elsewhere. Very few retail sectors showed any increase, and this that did – clothing, food, liquor, and general internet stores – all made only very slight gains.

Since all three months of the second quarter saw falling retail sales I think it is safe to say that the overall economy weakened from the first quarter’s already weak growth. If the sales figures are reflected in the personal consumption data within the GDP calculation, remember: the relationship is not one-for-one, then they will act a significant drag on growth. Since the first quarter came in at only 1.9%, and rings appear to have slowed down since then, the overall pace will be somewhere in the 1.0% to 1.5% range, depending on how trade holds up, and on how much negative impact comes in from the slowdown in government spending.

The issue then becomes what we can expect for the second half.

At the present pace things are not looking good. There is nothing in the wings with any certainty of turning upthat we can look to as a positive factor. All then risks appear to be on the downside. Our domestic policy possibilities are now highly limited. The election has stalled our already stagnant policy activity. The Fed spoke last week about its concerns, but there are sufficient policy hawks there to stall action until things are much worse. So we are rudderless. Add in the extraordinary self inflicted wounds in Europe and their damage to trade and word business activity, and the range of positives shrinks to negligible proportions.

Given this gloom I think GDP growth of any more than 1.5% is a stretch. This is well below anything that might make a dent on unemployment. Indeed the possibility will emerge, if things stay the way they are, that unemployment could tick up later in the year.

Under normal circumstances such weakness would spell doom for Obama. His weakness in leadership, not so much in action, but in terms of making a strong case for stimulus, ought to bring him down. But Romney represents the past and a continuation of the Reagan/Clinton/Bush obsession with deregulation and market magic. Since it was that obsession that brought us to the crisis, electing Romney would merely postpone the date of recovery by four years. So even with a rotten economy mired in depression it might be that Obama wins re-election. Quite what that means I am not sure. Especially with the strong likelihood of a Republican Congress able to prevent any remedial action being taken.

We are adrift. And we look set to stay that way.

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Weak, Very Weak Jobs Report

At this rate Obama will not be re-elected. At this rate he doesn’t deserve to be. Then again the Republicans present and even more dire prospect. Will no one rid us of this malaise.

My reaction to this morning’s very weak jobs report – the US added a meager 69,000 jobs in May – is to stifle a yawn and then to feel a surge of anger at the awesome ineptitude on display both in Washington and in our various centers of economic and business expertise. This mess is one we created and are refusing to clean up.

First the data:

We added 69,000 new jobs in May, worse yet: the numbers for the prior two months were both revised downwards with April being slashed back to 77,000. This is simply unacceptable. That slight burst of hiring we all were excited by back a few months ago seems to have been a quirk. The unusually warm weather allowed businesses to hire earlier in the year, that uptick was then exaggerated by the seasonal adjustment factor being applied and misled us. Subsequently the usual spring hiring surge was muted – the jobs were already filled – and the seasonal adjustment worked against us again. The best we can do is to look over a longer series of months, which is what we should always do anyway, and extract a trend.

That trend is miserable.

Our economy, for whatever reason, is not generating jobs. Nor is there any substantial prospect of it being able to. Instead of descending into wishful thinking and hoping the summer brings relief, we should all be demanding that Washington and our erstwhile leadership gets off its well padded rear end and does something other than feed us sound bites about how the other side is the problem.

Frankly both sides are the problem.

They both feed at the corporate trough. They both peddle variants on the same economics. They both are feeble. They both appear not to have the true measure of our problems. There is no backbone. No fire. No nothing.

Oh well.

That Wall Street, that center of predictive excellence – the ones that thought mortgage backed securities would never be toxic – could imagine we would add 170,000 jobs goes to show how far off the mark our elite thinkers have become.

When you are so well educated in wrong thinking you become utterly misguided. The recent past is a warning for all of us. It is quite possible to paper your wall with glittery degrees from first class schools and still be a complete fool. If they teach you alchemy you will emerge an alchemist, albeit one with straight A grades.

My advice to anyone wanting to study how an economy works is to avoid those schools and search for one that concerns itself with the economy rather than the dreamland that currently passes for economics at the top tier institutions.

Lest you think I am wrong: look around the world right now and identify a center of expertise – in the US in Europe, or in Japan – that is not mired in erroneous thought, proffering erroneous and damaging policy advice, and stuck up the neoclassical creek without a proverbial paddle. If your fundamental, basic, ground level thinking is wrong all the fancy architecture erected on that foundation, no matter how lauded and rewarded it is, will also be wrong. In economics you can win a Nobel Prize and still be a menace to society. Many have.

The problem is that regular folks pay the price. They actually get the sharp end of wrong theory. Despite what Robert Lucas and his confreres profess, people are fired against their will. They don’t want to be unemployed, but they are.

Gasp.

Perhaps we need a bout of layoffs in economics departments for the profession – if indeed it is a profession – to get the message. Quaint discussions in common rooms have awesome real world consequences. Fancy papers covering up the cracks in favorite theories, twists and tweaks designed to prolong the life of defunct thought, are weapons of mass destruction in the hand of ideologically extreme politicians who are grateful to grasp at any intellectual cover they can.

The steady subsidence of the UK economy into what appears to be a long recession is stark testimony to the complete bankruptcy of the austerity-to-growth notions that still dominate elite thinking. Here in the US the anemic policy response in 2009, followed by years of extraordinary political gridlock and partisan sniping have left us rudderless. We have a President who cannot articulate a strong common-man reason to attack our problems. He is a technocrat. A bureaucrat who loves to tinker and get enmeshed in the details. He is unwilling to slash and burn or to engage in the kind of fierce combat need to press back the fringes of extreme politics that are encroaching – and engulfing – our discourse. Romney is worse. He is steeped in far right business school ideology. He is willing to slash and burn. But only at the corporate level. He has no qualms about adding to unemployment. He knows how to create shareholder value. The problem is that those nostrums he holds most dear are precisely those that created this mess. He will make matters worse.

The MBA creed so deeply entrenched across the US is that shareholder value is the holy grail of capitalism. This is a bureaucratic concept created to allow armies of professional managers to extract value from business and pass that value back to whomsoever is lucky enough to own the shares of those businesses. It treats the workforce as a source of cost not as a source of productive capacity. Labor is something to be squeezed and trimmed. Wages are to be held down at all costs so that profits can be enlarged. It is a class struggle neatly wrapped inside a sanitizing layer of theory, soft touch human relations, and an ever proliferating web of jargon.

Like most things in life, shareholder value may make sense in limited quantities and when handled with care. It especially makes sense at the level of a company seeking to stay afloat. It has a Leninist quality – burn the village to save the village could easily be the operating mantra of private equity firms like Bain. Some jobs can be preserved, but only at the cost of some other jobs. Making that choice is distasteful and should be avoided when at all possible. It should not become the only policy. It should not dominate an entire economy. Yet it does.

And what makes infrequent sense in limited local places is deadly when aggregated into the entire economy.

By pursuing shareholder value and its related theories so relentlessly for the best part of four decades business has destroyed its own consumer market. By ignoring the need for wage growth, and hence mass spending power, business has slowly but surely shut down the engine of the US economy. At first the shift of wealth from wages to profits didn’t matter too much – consumers borrowed in order to keep up the buying habit. Eventually that source ran out. What’s left is an economy enfeebled. It is pointless to shift production to a low cost location if you cannot then bring those products home for sale because no one can afford them. So now companies are leery of ramping up employment because they don’t see a sales surge ahead. That surge is not their because companies have squeezed wages. Profits on the other hand are doing just fine. But this profits are increasingly sterile. They produce hoards of cash sitting under-invested. Banks are awash cash and cannot find enough willing borrowers. Money is abundant but underutilized.

Keynes could have predicted all this.

Those who managed to expunge his thought from the policy record could not.

When you base your entire thinking on the illusion that markets will always circle back to a full employment equilibrium, you are unable to detect, let alone opine about, effects that occur within inefficient markets. You wear intellectual blinkers that limit your vision to only one idea. If that idea is wrong – as I believe it to be – you condemn yourself to total failure. If, however, you acknowledge that markets are quirky, full of anomalies, and prone to odd results then persistent high unemployment doesn’t flummox you. It is a recognizable problem with recognizable cures.

Today’s weak jobs report adds yet another sad comment is an unfortunately long and growing condemnation of orthodox economic theory in all its guises. From rotten central bank forecasting and policy models through to the anti-social activity called shareholder value, the infestation of our economy by bad theory stands as a stark reminder that we are always in the thrall of some dead economists. Only this time the wrong ones.

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