Disastrous jobs report humbles a blogger

Once upon a time, a man who goes by the name of Rotten Apple wrote a post titled “The Bull Case for the US Economy“. Well, many moons have passed since then, but, to paraphrase Emperor Hirohito’s famous remark, in the meantime the economic situation has developed not necessarily to this humble blogger’s advantage. From the Bloomberg account of Friday’s disastrous employment report:

U.S. employers added 18,000 workers in June, the fewest in nine months, and the unemployment rate unexpectedly climbed, indicating a struggling labor market.

The increase in payrolls followed a 25,000 gain that was less than half the rise initially estimated, Labor Department data showed today in Washington. The median estimate in a Bloomberg News survey called for a June gain of 105,000. The unemployment rate rose to 9.2 percent, the highest level this year.

Hiring by companies, which excludes government agencies, was the weakest since May 2010.

The report is actually even worse than it looks on the surface, because yet again, the employment/population ratio fell (see below), which means that more and more people are dropping out of the statistics, masking the true extent of the problem.

Some highlights from Jared Bernstein:

–Payrolls not only went nowhere in June—up only 18,000—but May’s lousy 54K was revised down to 25K;

–Unemployment is now on a rising trend, up steadily from 8.8% in March to 9.2% in June;

–Both average weekly hours for people who have jobs, and their average hourly wages, fell slightly, meaning smaller paychecks and less buying power;

–The employment rate—the share of the working-age population employed, and a key measure reflecting employers’ demand for labor—was 58.2% in June, the lowest in almost 30 years;

–Underemployment, including the 8.6 million “involuntary part-timers” (meaning they want, but can’t find, full-time work), was 16.2%, up from 15.7% in March;

–The average unemployment spell is now just under 40 weeks, about 5 weeks longer than it was a year ago.

–The government sector continues to shed jobs, down 39,000 last month.  Due to fiscal tightening, state and local governments, down 25,000 in June, have been shedding jobs since mid-2008 and are now down 577,000 since August 2008.

–Manufacturing, which was a bright spot a few months ago, has added almost no jobs over the past two months.

The most striking representation of just how dire the situation is may be the chart below from Calculated Risk.

Meanwhile, despite talk of a deal to raise the US debt ceiling in exchange for $4 trillion of deficit reductions over the coming decade, the word on Friday was that differences between the two parties remain, and no deal is imminent. Friday’s employment report raises the stakes. The economic recovery is clearly in a very fragile state. If Obama overdoes the fiscal tightening in exchange for raising the debt ceiling, there is a very good chance the economy will plunge back into recession.

As Felix Salmon notes, perhaps the most depressing part of Friday’s gruesome jobs report is the utterly clueless response by the politicans. We already know that Obama has no plan at all to deal with the jobless situation, (on Friday he spoke of an infrastructure bank, free trade deals and patent reform), but even if he did, the chances of him getting it through Congress are next to nothing. Here is what Republican Speaker of the House John Boehner had to say on Friday:

The American people are still asking the question: where are the jobs? Today’s report is more evidence that the misguided ‘stimulus’ spending binge, excessive regulations, and an overwhelming national debt continue to hold back private-sector job creation in our country. Legislation that raises taxes on small business job creators, fails to cut spending by a larger amount than a debt limit hike, or fails to restrain future spending will only make things worse – and won’t pass the House.

Republicans are focused on jobs, and are ready to stop Washington from spending money it doesn’t have and make serious changes to the way we spend taxpayer dollars. We hope our Democratic counterparts will join us and seize this opportunity to do something big for our economy and our future, and help get Americans back to work.

But this is not a plan, it’s a prayer.

In the world that Republicans like John Boehner inhabit,  just get rid of all the regulations and keep cutting spending, and, before you can sing the first verse of Puff the Magic Dragon, the private sector will suddenly start hiring millions of people. If anybody out there can explain how this is possible in the middle of a balance-sheet recession when consumers are deleveraging, I would like to hear.

Here endeth this rant. Enjoy the weekend folks.

Comments

  1. What a shame that the calculatedrisk graph doesn’t also include post-’29 unemployment graph.

    It’s fascinating to see that the last 4 US recessions have had the longest and slowest declines in unemployment.

    I wonder how Adam Carr over at business spectator will spin the positive out of the June unemployment data?!?

  2. Ahh, the government spending cuts, Bush tax cuts and trickle down theory seem to be working.

  3. A bad US economy improves the chance that the Repubicans can take the White House. So you can expect them to not budge an inch on the issue of tax increases. The Democrats Senate will not accept a plan with spending cuts but no tax increases.

    If history repeats itself, this is how it’ll will play out : August 2nd will come without the debt ceiling being raised. Social Security cheques are not mailed out on 3rd August, and Dow Jones tanks 8% in a day. Financial Institutions start dumping US bonds for something more secure : CASH. They’ll get it and then deposit it at the Feds. The Feds then have a choice : QE3, or watch the system go bust.

    US bond interest rate will go up, and the Republican will blame it on QE3. They will call for Bernanke to be impeached (cart? horse? who cares?). This takes the Fed out of action. In the middle of August, there is 500 million dollars worth of bond which has to be rolled over. It won’t be rolled over, and the US defaults.

    After that, it’ll all be academic.

    • And the average Joe will never realise that it didn’t happen because the US government couldn’t spend but because it WOULDN’T spend.

  4. The biggest issue facing the US labour market at the moment is government layoffs. US governments at all levels (local, state and federal) are so strapped for funds, and in many cases so deep in debt, that staff are being let go about as fast as private-sector jobs are created.

    It seems likely that this will continue for some months yet. Until that peters out, employment in the US will look pretty dire.

  5. Montgomery Burns

    One of the more lucid Ron Paul suggestions (for a very long while) has been to close the hundred of US military bases overseas. Obama may also try reconsidering why he is fighting Bush’s nutty wars (Nobel peace prize and all) and how much a withdrawal would save (without any loss of US security).

  6. wayne from st albans

    they are trapped in an ideology
    of their own making – hubris, self belief,
    magical thinking, left v right etc

    America 2.0 awaits

    • This touches on one of the things I have been wondering with every article about the impact of a common currency on the countries in the Eurozone (ie the needs of Germany vs Greece).

      Surely this problem is also true, albeit to a lesser extend, for large nations such as the States (Texas vs California) and perhaps even Australia (WA vs TAS)?

      • Montgomery Burns

        Texas and Tasmania are part of a political federation. Greece is still politically sovereign.

        The similarities are that Texas, Tasmania and Greece are all currency users and therefore the analogy with households holds.

        Australia and the USA are currency issuers therefore the analogy with households doesn’t hold.

        So Greece, Texas, Tasmania etc. cannot devalue their currencies and so on when they dig themselves into fiscal holes (perhaps California, New South Wales would be better) because they are users of currencies, i.e. they do not control the currency.

        • My point exactly. Greece is being pointed at as an exceptional situation where a member state* is experiencing difficulties because the option to devalue its currency is not available.

          To me this doesn’t seem so exceptional when I look at states such as California. I bet California wouldn’t mind further devaluation of the dollar in order to purge themselves of their debt a bit more easily. Within large nations you will always have conflicting interests between regions and states.

          Just wondering whether the Greek situation would have been judged differently if European integration wasn’t something relatively new but just taken as a fact. It’s how perception influences judgement what I find fascinating in this regard.

          * I avoid the word ‘nation’ on purpose for the sake of argument

          • Great to see someone else thinking along these lines.

            Monty Burns is PARTLY right; but in so far as States have different laws, and especially different fiscal policy, it does matter that they are tied into a monetary union and do not have their own currency that fluctuates according to the performance of their economy.

            The SIZES and the past economic track records are wrong, but it is kind of as if Texas is Germany and California is Greece. Except California is not a “weak economy” new entrant into a monetary union. Imagine if it was Germany that had rested on its past laurels, coasted economically, and had massive fiscally irresponsible, featherbedded government spending – and you will be close to what California is like to the USA economy. If it wasn’t for California the US economy would easily be the strongest in the world by a wide margin. They wouldn’t even have had a Wall Street crisis and any recession would have been minor.

            The rest of the world would still be in trouble, only not able to blame Wall Street.

  7. RA

    There is a simple approach to stimulating the US economy to provide employment; but it does require pragmatism and the putting aside some neo-classical ideology.

    The issue is how to create more money to stimulate the economy without raising debt.

    Debt is an asset of the banking system and money is the corresponding liability (deposits). So the question is what asset can you put onto a bank balance sheet that is not domestic debt in an over-leveraged economy that is going to increase the banks’ deposit liabilities?

    The answer is to do what China does (and the US and Australia did when they had high rates of economic growth) and raise foreign reserves. The simplest immediate approach to achieve that would be for the Federal Reserve to apply a cap on the US dollar at a lower exchange rate than at present. Alternatively, allow the US dollar to fall but cap it to prevent it rising.

    This approach allows money to flow into the US economy rather than drive the exchange rate up above the cap. That new money entering the economy would be money that reduces net foreign debt and it would stimulate the economy, providing employment. On the banks’ balance sheets, it could be foreign reserves or deposits with the Federal Reserve (who would hold the foreign reserves).

    There would be issues about what happened once you had kicked started the US economy.

    Would you raise the cap to prevent excessive economic growth (China’s desirable problem) and inflation? If you did not, it would mean that it would no longer be possible to use interest rates to mange credit growth. Higher interest rates would attract foreign capital inflow and that would exacerbate the problem. Thus, quantitative controls would be required on bank lending– another ideological problem for those who believe in the current failing system.

    A long term approach for those who want a sustainable market system would be to follow the monetary system explained in my blog on an optimum exchange rate system:

    http://macrobusiness.com.au/2011/04/leigh-harkness-an-optimum-exchange-rate-system/

    • It sounds very “simple”. But what the reactions from other countries would be, especially China? World War III?

      • China can not complain because the US does not have a “pure” float. Its exchange rate is fixed. It is not that the US would be reducing trade. It would be increasing its output (income) and increasing trade (imports and exports), including trade with China.

      • On second thoughts, you may not appreciate how devaluation can raise income and imports.

        Assume the US GDP was $100T and exported $10T and spent 10% of its income on imports, ie imports were $10T.

        Now assume that the US devalues 5% and the value of exports (in US$ terms) rises to $11T and the country spends only 9% of its income on imports.

        The country would experience rising incomes from the additional export income and the increase in demand for domestic products (from 90% to 91% of income).

        Equilibrium would be reached when income had risen to $122T and imports were $11T (9% of $122T).

        So, the US would have increased income (providing employment) and imports from the rest of the world would be higher.

        • But the US imports more that it exports and a big part of that import is oil.

          A falling US dollar raises oil prices automatically which we all know are currently the foundation of the US economy.

          If oil was at $50 the US economy would be flying right now.

          • MB

            Even if oil were $1, under the current monetary system, the economy would continue to import more than it exports.

            Unemployment is caused when countries do not earn/produce enough to keep everyone employed. Current account deficits are caused when countries spend more than they have earned.

            To explain US unemployment, let us assume that we have the same example described above where GDP was $100T, exports were $10T and 10% of GDP was spent on imports. In this case we are using the floating exchange rate system.

            If exports rise to $11T, then the ex change rate rises to increase the proportion of GDP spent on imports to 11% or $11T. GDP remains at $100T, of which $11T is earned from exports and the income from the sale of domestic products has fallen from $90T to $89T.
            The reduction in spending on domestic industries (such as manufacturing) causes unemployment in those industries. There may be additional employment in the industries with increased exports but that increase is usually less than the unemployment caused in the industries that have declined.

            The net effect is no increase in income and increased unemployment. Even if it were the same, there is unlikely to be additional employment to take up the growing labor force.

            The current account deficit is caused by the growth of bank credit. If GDP/production/income were $100T and banks lend $5T, then everyone who earned their income of $100T spends $100T and the additional $5T of bank lending increases total expenditure to $105T. As expenditure exceeds income by $5T, the current account deficit would be $5T. Even if the lending leads to an increase in income, that income may provide some employment but total expenditure would still exceed total income by $5T.

            Growth in bank credit may have been increasing employment in the past. However, once the economy is saturated with debt, lending cannot grow so there is no stimulus to reduce unemployment.

            You may find the following blog on US debt and income useful:

            http://www.buoyanteconomies.com/DebtIncome.htm

    • Leigh – An intriguing idea. Forgive me if I am missing something (which is quite possible) but how would this proposal reduce net foreign debt? In order for that to happen the cap on the USD would have to be set low enough to return the current account to surplus, wouldn’t it? Given the size of the CAD the size of the devaluation needed would be pretty huge, would it not?

      Cheers, RA

      • RA

        The current account deficit is not caused by the exchange rate. It is caused by the growth of bank credit which finances expediture to be greater than income (output).

        A high exchange rate makes a country uncompetitive and lower income. A low exchange rate (as in China) raises makes a country more compeitive and raises income. But even a country with a low exchange rate, if it raises the growth of bank credit can have current account deficit.

        See the US current account deficit:

        http://www.buoyanteconomies.com/USACAD.htm

        And if you have time to go through it, see the formula for the current account deficit:

        http://www.buoyanteconomies.com/CAD_Formula.htm

        • Thanks Leigh. This is very interesting stuff. I need to spend some time reading over the articles on your site. May have some questions after that!

  8. there is simply too much debt

    get rid of it

    consequences cannot be wriggled away from – stop trying, else you bring the entire system down (it is already basically dead!)

    default, really, is the only “cure”

    sorry to say it 🙁

    • I agree, and the people who stand to lose the most, i.e. the Chinese, DESERVE to lose it, because THEY have used “buying US dollars” as a deliberate trade wars tactic.

      The industry has to go back to the USA some time; there are signs it already is, in the Southern States with their “businesses welcome” policies.

  9. (1) A financial system that rewards outsourcing of jobs and technology on a quarterly cycle.
    (2) A banking system that does not lend after being bailed out.
    (3) A population that live beyond their means, and consume energy at breakneck speed.
    (4) Inability to agree on tax, and over the years the nation’s infrastructure is on it’s last legs.
    (5) Manufacturing that is still going building products people don’t want or can’t afford (in general).
    (6) Ongoing wars/conflicts that sap the youth of the nation which leaves a scar in many senses. There are massive problems in this regard and I saw it living in San Diego near Camp Pendelton. Many returned soldiers are in a bad way physically and mentally.

    There are probably others, but structurally the economy is not ready for a world where most products are made in China, and if you’re familiar with IT that coming mainly from India where about 500,000 engineers graduate every year.

    There are lost of reasons for the US’s position, but for the economy to bounce back like the FED thinks IMO is naive. We’re not in the 1980/1990 anymore and the world has changed. Also, a nation debt of around $77 Trillion if all the obligations are considered.

    I think the US could recover economically, but the country has to change and it will be interesting to see if they can.

    • and if you’re familiar with IT that coming mainly from India where about 500,000 engineers graduate every year.

      And yet, 95% of the great innovations in IT still come out of the US. Where is the Indian iPhone, the Indian Facebook, or the Indian Google?

      While I agree with most of your points 1-6 above (I think US manufacturing is in much better shape than you suggest) there are pockets of the US economy that aren’t burdened with debt, that are being richly rewarded for innovation, and will ultimately drag America out of the hole it has dug for itself.

      There has be a lot of creative destruction happen in America in recent years. US corporations are now lean and mean, and innovating like crazy. In contrast, Chinese corporations are yet to go through a cleansing recession. They’ve grown fat and lazy on cheap credit and cronyism. All you have to do to make a buck in China is know the right party official, borrow some free money, and build something no-one wants or needs. You can’t get away with that in post-GFC America.

      Of course, similar things could be said about Australia. Twenty years of uninterrupted growth has left us with a lot of fat and inefficiencies. Look at our pathetic productivity growth! For a decade now, all you have to do in Australia to get rich is buy a mining lease and start digging. Ever higher commodity prices have meant that businesses that would not have survived in normal times are creating paper billionaires.

      This might all sound like madness to MacroBusiness bears, but I genuinely believe America is further down the path to a sustainable recovery than China and Australia.

      • Agree Lorax that some US corporations are doing well, and I worked for one up until last year. Alot of the minds are foreign on H1B visa which structurally not a sound position. There is a strong innovation culture and venture capital so you can succeed, but my concern is the size of the debt, and how long it will take to sort the economy out.

        I was in China’s silicon valley this year, and I constantly hear that China is way behind and there is some truth to that, but everything I saw in that area blew me away and it wasn’t copied. I’m an engineer by profession and I know when someone knows what they are doing. There is a lot written about China’s scientific position, and I’m not convinced that they are as behind as many would have us believe. I saw quite a bit, and it was impressive.

        I totally agree on your Australia comment. As an engineer it’s disturbing to see how far we are behind in the time I’ve been away. We’re training students that have no hope of a job in science and engineering is the message I get from my uni professors now. This current government have no vision so we’ll continue to be a quarry. However, if the R&D funding is not destroyed for the CSIRO we might still be able to claim some wins.

        I have more faith in the US than I have in Australia BTW so we’re sort of on the same page.

      • Lorax:
        Your faith is remarkable. I sincerely hope you are on the right track, if only to keep my Social Security coming.

        As far as the Indian Facebook & Google are concerned, they are being created by the Indians working in Silicon Valley, sucking up enough know-how to go do the same thing at home.

        The iPhone is a good example, tho – IF the Apple culture could only be replicated in other fields. But, given the extent of the “screw everyone for a quick buck”, and the IBG-YBG culture there, anyone with some creative juice is either squeezed out or overly-exploited. I watched it happen, time and again, destroying good companies in the process.

        The fundamental problem in the US is the lack of productivity that is competitive in the global market. The current problem is the refusal to recognize and act on the fundamental problem.

        There are a lot of good people in the US, but with leadership like theirs . . .

  10. Usa has over 360+mill people. Your manufacturing and low level service jobs are now in Asia. You need the top 2% rich people to re-invest their money. Sadly 2% of the rich in USA own 50% of all wealth. Wake up guys. These guys made money by sending jobs overseas.

  11. Sandgroper Sceptic

    Ending the wars in Afghanistan, Iraq, Libya and closing loads of military bases overseas would make a difference. I think the US spends something like $700bn (and possibly more for under the radar programmes) per year on the military. Cut in half you might scrape $350-400bn a year in savings. Why the US still has bases in Japan, Western Germany etc makes little sense. Still that is only a third of the fiscal deficit so they will have to do more than just slashing military spending.

  12. “Unexpected” Currently the most commonly used word in the economists lexicon. On a par with the “Undecided” decal on the bogan ute.

  13. The USA, or rather, the “business friendly” States, are still the only part of the world worth moving to or investing in. Every nation in the world is highly vulnerable and likely to have a very messy crash. Only the Southern USA looks resilient to me – industry is moving there because urban land is cheaper than in China or India, let alone California; regulations are low and start-up is quick and cheap.

    The elephant in the room, is how nations “plan” for urban growth. Mostly, it is a racket, which causes unaffordability and cyclical volatility in urban land prices. Any part of the world that does not have this, is bound to “outgrow” the parts that do not. Look at the USA 1946-1990; look at the Southern States 1946-now; look at Australia, France and Germany 1946-1990 odd before “save the planet” urban planners reinstated the age-old rent-seeking, “planning gain” racket in urban land.

  14. “In the world that Republicans like John Boehner inhabit, just get rid of all the regulations and keep cutting spending, and, before you can sing the first verse of Puff the Magic Dragon, the private sector will suddenly start hiring millions of people. If anybody out there can explain how this is possible in the middle of a balance-sheet recession when consumers are deleveraging, I would like to hear.”

    Well for starters there is self-employment. Almost one fifth of Australia’s work force is self-employed. To think of it as one monolithic private sector that somehow needs to hire people, frames the situation incorrectly. People need to, and like to, do things of value for other people in exchange for other things of value, usually with money as an intermediary. They can do this as individuals, or as small groups, or as larger businesses.

    Debt can be extinguished by creating goods and services that are of value to creditors, or if the debtor is over-extended, by defaulting and passing of any assets to the creditors.

    • Yes, there is self employment, but the point is that we have almost 10% of the workforce unemployed in the US at present (much more than this if you measure it properly). Households have increased their savings rates since the recent crisis and many of them are stuck with negative equity in their homes. This deleveraging trend could take years to play out. One person’s spending is another person’s income. In such a situation if the government cuts spending too, there is no way that enough jobs are going to be created.

      I agree that more of the debt needs to be written off through default/debt forgiveness.

      • “One person’s spending is another person’s income. In such a situation if the government cuts spending too, there is no way that enough jobs are going to be created.”

        If the government cuts spending, the total amount of spending may reduce in the short term, but will eventually rise as individuals and businesses cater to the wants and needs of those with savings rather than the wants and needs of those already in debt.

        A job consists of two aspects – the doing of something useful for one’s self or for others, and a payment for that, either in money or some other reward.

        Government can easily provide the payment part but may fail to provide the rest.

        On the other hand most individuals are quite capable of finding people with savings who would like to acquire particular goods or avail themselves of particular services, and are therefore better placed to create both aspects of a job.

        If the government cuts spending there will be a period of time where jobs are lost, as people adjust. However in the medium term the released labour capacity will cater for the wants and needs of those with high savings, and therefore savings will be released for spending and deleveraging.

  15. Is it possible that an overhaul of the US’s economic structure is taking place?

    Many companies, particularly in the manufacturing and industrial sectors, have recorded higher growth and higher value-addition, at the same time as posting job losses. I am an Aussie over here in the US, and work in the aerospace industry and am seeing this first-hand.

    Work by Michael Spence (“The Evolving Structure of the American Economy and the Employment Challenge’) found that in between 1990-2009, it was only the non-tradable sector that added jobs to the US economy, but the tradable sector share of GDP increased. The conclusion was that US companies were shifting the lower value-added jobs on the supply chain overseas (assembly, component production) and only retaining the higher value-added services (R&D, design, etc).

    So I wonder if jobs are not being added, in part, because companies just don’t need that kind of work force anymore? Is better IT and information processing now supplanting a human workforce as companies upgrade their software, while downgrading their work force? I wonder if these workers, who learned their trade because their parents were part of the American manufacturing boom, will become part of some sort of “lost generation” since they cannot find employment for their skillset.