|
Recession Grips the Job Market
Treasury, Fed Policies Aggravating Risks
Peter Morici
Today, the Labor Department reported the economy lost 49,000 payroll
jobs in May, after losing 28,000 jobs in April. My published forecast
was for a 50,000 loss.
Governments added 17,000 jobs and private sector employment fell
66,000. Businesses have become too pessimistic about the outlook for
the economy, and the capacity of the Bush Administration and Federal
Reserve to manage it. While exports remain strong, domestic demand is
weak and shows few signs of recovering.
The Labor Department reported a sharp increase in the unemployment rate
to 5.5 percent in May from 5 percent the previous month. The
situation is even worse than this jump indicates. A large number of
adults have left the labor force in recent years. Factoring in the
decline in the number of adults participating in the labor force, the
unemployment rate is closer to 7.0 percent.
Five straight months of job losses are the strongest evidence yet that
the economic expansion has slipped into a recession of uncertain depth
and duration.
Weakening consumer spending and slow automobile sales indicate high
gasoline prices and the subprime crisis have slowed down consumers.
Along with weakness in housing and nonresidential construction, slowing
consumer spending and automobile sales are causing businesses to trim
investments in new capacity and hiring plans.
Exports are lifting sales and employment in commodities and basic
industrial materials, but overall a weaker dollar against the euro and
other currencies and the resulting increase in exports are not enough
to save the economy from recession.
Treasury and Federal Reserve Policies Aggravating Inflation, Recession Risks
Rising prices for food, energy, metals, and other materials are pushing
up inflation, and U.S. energy, Treasury exchange rate and Federal
Reserve policies are exacerbating problems and contributing to the
likelihood of a recession followed by a period of slow growth.
The ethanol program is pushing up food prices, and robust growth in
China and elsewhere in Asia are pushing up energy and raw material
prices. The Fed could only marginally affect those pressures by
constraining U.S. growth through higher interest rates.
China is controlling domestic prices for gasoline and other refined
products, subsidizing oil imports with the dollars it obtains through
its purchases of U.S. dollars to sustain an undervalued yuan, and
increasing demand for oil more rapidly than it is contracting in the
United States. The combined dynamic of U.S.-Chinese integration and
Chinese intervention in currency and oil markets is to drive up exports
and growth in China, drive up gasoline and other energy prices in the
United States, and slow growth and increase unemployment in the United
States.
Treasury’s inaction regarding China’s policy of buying dollars for yuan
to sustain an undervalued currency permits China to continue to
subsidize manufactured exports and oil imports, and expand its
purchases of oil more rapidly than the United States reduces imports.
This is pushing up the international price of oil, gasoline and diesel
prices, cushioning the Chinese economy from the U.S. economic slowdown,
and exacerbating the economic slowdown in the United States.
The Federal Reserve’s aggressive interest rates cuts have had a limited
effect on GDP and employment growth, and the stimulus package is not
large enough to compensate for rising gasoline prices and the meltdown
in the credit and housing markets.
The stimulus package at $152 billion is hardly enough to offset higher
gasoline prices, and less than half as large as the losses taken by the
major New York banks and their customers on subprime securities. The
stimulus package is lessening the pain imposed by soaring gas prices
and flagging domestic demand for U.S.-made goods and serves, but it is
insufficient to head off a recession.
The Federal Reserve is in crisis, because its mix of policies addresses
an old style recession, one premised on inadequate demand but solid
financial institutions. This recession has its origins in questionable
banking practices and a breakdown of investor trust in the integrity of
Wall Street’s most venerable banks and investment houses.
Federal Reserve regulators, apparently lacking appreciation for the
gravity of these problems, have focused mostly on urging banks to raise
new capital without effective parallel efforts to reform bank business
models and practices. Often, new capital has been provided by sovereign
wealth funds or private equity firms, which lack sophistication in the
intricacies of commercial and mortgage banking and demand few changes
in bank management policies. The result is sophisticated buyers of
fixed income securities, such as insurance companies, remain unwilling
to accept loan-backed securities from the banks. The market for
mortgage backed securities issued by commercial banks has evaporated.
The housing sector has been in a recession for months, in significant
measure, because the market for mortgage-backed securities has broken
down. At this time, banks can only write conforming loans that can be
sold to Fannie Mae or held on their balance sheets. The bond market
will not accept mortgage-backed securities underwritten by the major
Wall Street banks, and this significantly curtails the market for less
than prime securities.
The whole chain that creates financing for mortgages and other consumer
loans has been corrupted from loan officers to banks that bundle loans
into securities, to bond rating agencies like Standard and Poor’s who
demand payments from banks instead of charging investors to evaluate
mortgage-backed securities.
The Federal Reserve and Treasury need to prod the private banks to
reform lending practices, and to encourage bond rating agencies to
return to investor financed ratings. Unfortunately, Henry Paulson
and Ben Bernanke have been shy to do this..
The economy is sailing through dangerous, unchartered waters, and Henry
Paulson and Ben Bernanke, the helmsmen, seem confused and unsteady,
adding to pessimism about the outlook for U.S. GDP growth and
jobs.
The Fed’s inadequate response to the credit crisis is undermining the
exchange for the dollar against the euro. Cheap dollars permit
Europeans to bid up the price of oil, further pushing up U.S. gasoline
prices and exacerbating the U.S. economic slowdown.
The bottom line, Treasury and Federal Reserve policies toward China and
the banks are manufacturing higher oil prices, inflation and recession.
It is no small wonder the economy is hemorrhaging jobs.
Weak Wage Growth and Unemployment
Construction, manufacturing, finance, and retail trade displayed weakness, reflecting significantly slower GDP growth.
Wages increased a moderate five cents per hour, or 0.3 percent.
Moderate wage and strong labor productivity growth should help keep
core inflation in check, and this should help abate Federal Reserve
concerns about nonfood and nonenergy price inflation, so-called core
inflation, as it navigates the fallout from the subprime crisis.
What problems the Fed faces in the core will be pass-through from
higher food and energy prices.
The unemployment rate was 5.5 percent in May. These numbers belie more
fundamental weakness in the job market. Discouraged by a sluggish job
market, many more adults are sitting on the sidelines, neither working
nor looking for work, than when George Bush took the helm. Factoring in
discouraged workers raises the unemployment rate to about to 7.0
percent. As the economy slows further this figure will likely
exceed 8 or even 9 percent.
Overall, the pace of employment growth indicates the economy is
contacting. Second quarter growth in GDP should be in the range of
negative 0.4 percent. Ford and GM have announced further production
cutbacks and builders have an 11 month supply of unsold new homes. Auto
production and housing starts should not improve much until the fourth
quarter, at least, and those conditions will feed into the rest of the
economy. The jobs outlook should not markedly improve until at least
the second half of this year.
Manufacturing, Construction and the Quality of Jobs
Going forward, the economy will add some jobs for college graduates
with technical specialties in finance, health care, education, and
engineering. However, for high school graduates without specialized
technical skills or training and college graduates with only liberal
arts diplomas, jobs offering good pay and benefits remain tough to
find. For those workers, who compose about half the working population,
the quality of jobs continues to spiral downward.
Historically, manufacturing and construction offered workers with only
a high school education the best pay, benefits and opportunities for
skill attainment and advancement. Troubles in these industries
push ordinary workers into retailing, hospitality and other industries
where pay often lags.
Construction employment fell by 34,000 in May. This is a terrible indicator for future GDP growth.
Manufacturing has lost 26,000 jobs, and over the last 97 months
manufacturing has shed more than 3.7 million jobs. Were the trade
deficit cut in half, manufacturing would recoup at least 2 million of
those jobs, U.S. growth would exceed 3.5 percent a year, household
savings performance would improve, and borrowing from foreigners would
decline.
The dollar remains too strong against the Chinese yuan, Japanese yen
and other Asian currencies. The Chinese government artificially
suppresses the value of the yuan to gain competitive advantage, and the
yuan sets the pattern for other Asian currencies. These currencies are
critical to reducing the non-oil U.S. trade deficit, and instigating a
recovery in U.S. employment in manufacturing and technology-intensive
services that compete in trade.
Peter Morici is a professor at the University of Maryland School of
Business and former Chief Economist at the U.S. International Trade
Commission.
Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
Trackback(0)
 |
TrackBack URI for this entry
Subscribe to this comment's feed