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Today, the Labor Department revised up its estimate of second quarter productivity growth to 4.3 percent from its previous estimate of 2.2 percent. My forecast was 3.9 percent and the consensus forecast was 3.5 percent.
This is certainly good news for inflation and interest rate policy. Rapidly rising productivity growth coupled with easing oil prices will bring down headline inflation, as well as the closely watched core index of price increases, which excludes food and energy.
Simply, higher productivity permits businesses to better absorb increases in wages and benefit costs, and have something left over to help cover higher material costs. The Labor Department found that hourly unit labor costs actually fell 0.5 percent. Higher productivity should ease Federal Reserve fears about inflation and cause it to keep interest rates steady.
Rapidly rising productivity indicates U.S. industry continues to lead in the application of new and better methods for making and delivering goods and services, and continues to bang out great new products. The U.S. economy could perform very well with more supportive policies from Washington--getting the dollar exchange rate against the euro and Chinese yuan in line with prices; enlightened energy conservation, exploration and development strategies; and fixing the woes of banks and credit markets.
Friday, the Labor Department will report employment data for August. In July, the economy lost 51,000 jobs, and the consensus forecast is for another 75,000 jobs lost in August. My forecast is for a 65,000 loss.
Even as GDP grew at a robust 3.3 percent annual rate in the second quarter, employment continued the downward trend that began in December. Private business productivity advanced 4.3 percent, and this permitted businesses to meet a temporary surge in consumer demand while still winnowing payrolls.
The stimulus package tax rebates gave consumers a boost in May and June, but now consumers are trimming back. Gasoline prices, though easing, still are straining household budgets, car sales remain disappointing and skewed toward imports, and heating oil will be expensive this fall and winter. Overall, GDP growth should be about 1.4 percent in the third quarter and slow further in the fourth quarter. Unemployment will continue to rise.
From December through July, the economy lost 463,000 jobs. Manufacturing and construction shed 271,000 and 290,000 jobs, respectively, and in recent months, layoffs spread to finance and retail sales. If the economy is to pick up in the second half, the Friday jobs report will have to confound forecasters, who are generally pessimistic.
In Friday’s jobs report the key variables to watch are:
Jobs Creation. August 1, the Labor Department reported the economy lost 51,000 payroll jobs in July and shed an average of 76,000 jobs each month since December. The consensus forecast is that the economy lost 75,000 jobs in August. My published forecast is for a 65,000 decrease in employment.
Unemployment. In July, the unemployment rate, as computed by the Labor Department, was 5.7 percent, and is expected to hold steady at 5.7 percent for August.
Since President Bush took office, more adults have chosen not to seek employment owing to worsening labor market conditions. If labor force participation today were at the same level as when President Bush took the helm, the unemployment rate would be about 7.4 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count when computing the unemployment rate.
Business vs. Government Payrolls. In July, government employment expanded by 25,000, even as overall payroll jobs contracted 51,000. This indicates the private business economy shed 76,000 jobs. Failing tax revenues are crimping state and local budgets, and some state and municipal governments are now beginning to trim payrolls.
Construction. In July, construction lost 22,000 jobs, and manufacturing lost 35,000 jobs.
Residential construction shed nearly 5,000 jobs, while 17,000 jobs were lost in nonresidential buildings, roads and other infrastructure projects. This has been a persistent pattern for many months. Notably, since residential construction employment peaked in September 2006, that sector has lost 168,000 jobs, while the balance of the construction industry lost 389,000 jobs.
Those losses indicate the housing recession, credit crisis, high oil prices, and China trade deficit are infecting the long-term growth prospects of the entire U.S. economy. American businesses are simply not hiring or building for the future in the United States, and this bodes poorly for GDP growth in the second half of 2008 and beyond.
Retailing. Despite the May and June bursts in retail sales, retailing and nonautomotive retailing lost jobs each month in May, June and July, and 47,000 jobs overall. Even removing the automobile and parts dealers, employment was down 24,000. Retailers are anticipating a slow second half for 2008 and are trimming store staff to limit their losses.
Finance and Insurance. During the economic expansion finance and insurance, along with technology sectors offered some of the best new job opportunities, outside of health care and technology-related activities. In May, June and July finance and insurance shed 23,000 jobs.
It’s not just the U.S. credit crisis. U.S. financial services are facing tougher competition in booming markets, like the Persian Gulf, where the U.S. credit meltdown has tarnished the image of U.S. service providers like Citigroup. Increasingly U.S. investment banking firms cannot demand premium high prices for their services, as sophisticated buyers prefer local, more reasonably-priced and less-tarnished competitors.
Manufacturing. Over the last 100 months manufacturing has lost 3.8 million jobs. The dollar remains overvalued against the Chinese yuan and other Asian currencies, and the large trade deficit with China and other Asian exporters is a key factor pushing down U.S. manufacturing employment.
To keep the value of the yuan low against the dollar policy, the Chinese government intervenes in currency markets, selling yuan for dollars and other western currencies at a discount from a market determined price. In 2008, this intervention is exceeding $600 billion, or about 17 percent of China’s GDP and 43 percent of its exports of goods and services. These purchases provide foreign consumers with $4.4 trillion yuan to purchase Chinese exports, and create a 43 percent “off budget” subsidy on foreign sales of Chinese goods and services.
Many U.S. manufacturers find it easier to locate production in China and other Asia locations than add jobs in the United States to produce goods. U.S. made goods must scale considerable trade barriers and compete against subsidies provided by undervalued currencies in China, India and elsewhere in Asia and regulated fuel prices.
U.S. manufacturers have received little encouragement from the Bush Administration, and in particular Treasury Secretary Henry Paulson, that it will do much to level the playing field in Asia.
Were the trade deficit cut in half, manufacturing would recoup at least 2 million of the 3.8 million jobs lost since 2000. U.S. GDP growth would be in the range of 3.5 to 4.0 percent a year instead of 2.5 to 3 percent expected as the economy resumes normal growth the latter half of 2009. Real wages would rise briskly.
Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.
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Or, are we confusing the off-shoring of components and even entire products with productivity gains here? If an American manufacturer decides to off-shore components worth half the value of the product it ships into the US market and lays off half its work force, does its productivity really double? Maybe I misunderstand what the government is actually reporting -- if so, someone please correct me. If not, these numbers are just more government propaganda promoting the America last policies of the Bush administration.