On August 1, the Labor Department reported the economy lost 51,000 payroll jobs in July, after losing 51,000 jobs in June. Economists expected a 75,000 loss in June. My forecast was for a 60,000 loss.
Governments added 25,000. Factoring out government employment, which is fairly steady in times of economic distress, the private sector bled 76,000 jobs.
Over the last seven months the economy has lost 463,000 jobs. The banking crisis, high oil prices and the large trade deficit with China are causing employers to relocate to Asia rather than endure in the U.S. Tsunami.
Wages and Unemployment
Wages increased a moderate 0.6 cents per hour, or 0.3%. 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 core inflation will be one-time pass-throughs from higher energy prices, not permanent increases in inflation expectations.
The unemployment rate was 5.7% in July, up from 5.5% in June. However, 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 7.1%. As the economy slows further, this figure will likely exceed 8% or even 9%.
Overall, the pace of employment growth indicates the economy is settling into a troubling malaise. Second quarter GDP growth was 1.9%, thanks to a bump to May consumer spending from the tax rebate stimulus package. However, retail sales fell off in June and preliminary data indicates that continued in July. Ford and GM have announced further production cutbacks, automakers are having difficulties securing credit to finance auto leases, builders have a 10 month supply of unsold new homes, and prices for existing homes fall month after month.
Auto production, housing starts and the market for existing homes will not improve much until 2009 or perhaps 2010, and those conditions will feed into the rest of the economy. The jobs outlook should not improve satisfactorily until at least mid 2009.
In a nutshell, most inflation pressures are caused by higher oil and commodity prices in global markets, and by higher food prices, which are caused by strong demand in Asia for grains and the U.S. ethanol program; those forces are beyond the control of Federal Reserve monetary policy. Economic growth is likely to be slow the second half of 2008, the economy is likely to continue losing jobs, and higher interest rates would slow growth further and exacerbate job losses.
Yet, several members of the Federal Reserve Open Market Committee, which sets interest rate policy, are complaining about rising inflation expectations and brandishing higher interest rates to quell inflation fears. Thats a recipe for a housing market collapse, stock market rout and job market disaster.
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 for 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 22,000 in July. This is a terrible indicator for future GDP growth. Retailing shed 16.5 thousand jobs, and financial services lost 2.1 thousand.
Manufacturing has lost 35,000 jobs, and over the last 100 months, manufacturing has shed more than 3.8 million jobs. The trade deficit with China and other Asia exporters is a major culprit.
The dollar is too strong against the Chinese yuan, Japanese yen and other Asian currencies. The Chinese government intervenes in foreign exchange markets to suppress the value of the yuan to gain competitive advantages for Chinese exports, and the yuan sets the pattern for other Asian currencies. Ending Chinese currency market manipulation is 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.
Were the trade deficit cut in half, manufacturing would recoup at least 2 million of those jobs, U.S. growth would exceed 3.5% a year, household savings performance would improve, and borrowing from foreigners would decline.
Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.