Analysis: Friday's Jobs Report from the Labor Department

Friday's Job Reports

By Peter Morici

Friday, the Labor Department will report employment data for November. In October, the economy lost 240,000 jobs, and the consensus forecast is for another 300,000 jobs lost in November. My forecast is for a 275,000 loss.

From December through October, the economy lost 1,078,000 jobs. Manufacturing and construction shed 517,000 and 508,000 jobs, respectively, and in recent months, layoffs spread to finance, retail sales, and other sectors.

The banking and housing crisis and the trade deficit are central culprits dragging the economy into recession and causing steep job losses. President-elect Obama?s designation of Timothy Geithner and Lawrence Summers as Treasury Secretary and Director of the National Economic Policy Council so far offers little indication of fundamental change from the Bush Administration?s vacant approaches to correcting the structural problems causing the downward spiral in GDP, employment and national moral.

Timothy Geithner, as President of the New York Federal Reserve, is one of the principal architects of the Bush Administration?s bank bailout policy, which has already pledged some $8 trillion in equity, loans and guarantees to resolve a crisis caused by about $2 trillion in mortgage-backed securities without unlocking credit markets. Geithner was a principal player, for example, in the recent $300 billion dollar bailout of Citigroup, which permitted shareholders, including Saudi Prince Alwaleed bin Talal, to maintain control of the bank and executives, including Vikram Pandit and Robert Rubin to keep their managerial authority and huge bonuses that caused the near bankruptcy of Citigroup.

A consensus must be forged on reform compensation schemes that encourage reckless banking practices, the workout of salvageable mortgages by banks receiving federal aid, and the unlocking of credit markets by restarting the sale of regional banks, through large New York banks, to insurance companies, pension funds and fixed income investors. That task falls to Lawrence Summers, Robert Rubin?s protégé and senior partner in the Geithner-Summers partnership. Mr. Summers? record as Harvard President offers little hope that he has the diplomatic skills to forge such reforms.

The trade deficit, which in recent years has topped 5 percent of GDP, is a huge drain on demand for U.S. goods and services. Imports exceeding exports by 5 percent requires the Americans to consume 105 percent of what they produce to keep the economy going. Essentially, Chinese, Saudi royals and other foreign sovereigns and private investors have been buying the bonds that permit Americans to borrow to consume more than they produce. Foreign lenders bought Treasury securities and collateralized debt obligations that fueled the housing bubble, reckless lending against home equity, and foolish household borrowing. That house of cards has collapsed, and without a sizeable reduction in the trade deficit, a sustainable growth path for U.S. GDP is not possible.

Oil imports and trade with China account for 90 plus percent of the trade deficit. Policies that conserve oil, boast domestic energy production, and redress the trade deficit with China are urgently needed. While needed, projects to boost alternative energy sources will hardly quickly help oil imports, and the diplomacy, favored by both Bush and Obama, have failed to persuade China to stop subsidizing its exports, undervaluing its currency and manipulating the rules of free trade. Chinese mercantilism is rocking Mid-Western manufacturing while both the Bush Administration and government in waiting behave as if this is a grand chess match for global diplomats with no urgency.

These problems require quick, radical and unconventional solutions–solutions that will upset the thinking of free market economists. Unfortunately, Geithner and Summers are not known for out of the box thinking. High Priests of the Temple of Conventional Wisdom, they are likely to look at anything beyond gas taxes and subsidies for alternative energy sources as acceptable energy policy, and view direct action to redress Chinese mercantilism as protectionism.

An infrastructure-focused stimulus package, rather than more tax rebates, can provide some quality jobs quickly and limit the depth of the recession. However, the Japanese experience and our own Great Depression indicate that unless structural problems are addressed repeated jolts of stimulus will be required with no end in sight.

Americans are borrowing $50 billion from foreign governments and private investors, and with a stimulus package this will likely surge to $70 billion or more. The United States already owes foreigners about $7 trillion, and at some point the line of credit will run out.

Along with lax banking practices, these foreign capital inflows, compelled by the trade deficit, created the easy credit environment that caused the housing bubble. Reflating the economy through huge government spending and budget deficits, without addressing trade with China and oil imports, would not create enough good paying jobs to reverse the downward slide in workers wages. To stop the destruction of good paying jobs, Obama must push through an infrastructure-focused stimulus package to soften the impact of the recession and stem jobs losses, and at the same time, he must fashion policies to unlock credit markets, reduce oil dependence and fix trade with China.

In Friday?s jobs report the key variables to watch are:

Jobs Creation. November 7, the Labor Department reported the economy lost 240,000 payroll jobs in October, 328,000, in the third quarter and 1,078,000 jobs since December. My forecast is for a 275,000 loss in November and for 765,000 for the fourth quarter overall.

The economy continued to expand during the first half of 2008, but productivity rose faster than demand for goods and services, thanks to the devastating impacts of higher gas prices on consumer buying power and automobile purchases, subsidized Chinese imports on employment in U.S. manufacturing, and the banking and housing crises on construction activity.

In the third quarter, GDP contracted. Preliminary estimates indicate GDP fell at a 0.5 percent annual rate, and the contraction in GDP is accelerating in the fourth quarter. Job losses averaging more 200,000 will continue for several months into 2009. We will not see the worst of things until at least the end of the second quarter of 2009.

Unemployment. In October, the unemployment rate, as computed by the Labor Department, was 6.5 percent, and is expected to rise to 6.3 percent for October.

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 7.9 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count when computing the unemployment rate. Add workers in part time positions that cannot find full time employment and the hidden unemployment rate is about 12 percent.

Business vs. Government Payrolls. In October, government employment expanded by 23,000, even as overall payroll jobs contracted 240,000. This indicates the private business economy shed 263,000 jobs. Failing tax revenues are crimping state and local budgets, and some state and municipal governments are now beginning to trim payrolls.

Construction. In October construction lost 49,000 jobs, and manufacturing lost 90,000 jobs.

Residential construction shed nearly 8,000 jobs, while 39,000 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 199,000 jobs, while the balance of the construction industry lost 464,000 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 2009 and beyond.

Productive assets not put in place over the next twelve months will not be available to produce goods and services after the recession ends. The U.S. economy will be on a permanently lower growth trajectory thanks to mismanagement of the credit crisis, energy policy and trade with China and other Asian developing countries pursuing mercantilism strategies.

Retailing. Retail trade has shed 321,000 jobs since November 2007, and lost 38,000 jobs in October and 45,000 jobs in September.

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. Since April, finance and insurance shed 54,000 jobs, and 15,000 in October alone.

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 103 months manufacturing has lost 4.0 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 nearly $700 billion, or about 18 percent of China?s GDP and 46 percent of its exports of goods and services. These purchases provide foreign consumers with $4.7 trillion yuan to purchase Chinese exports, and create a 46 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 more than 2 million of the 4 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 growth the latter half of 2009. Real wages would rise briskly.

Peter Morici is a professor of the Robert H. Smith School of Business, University of Maryland, College Park, MD 20742-1815, 703 549 4338, Cell 703 618 4338, [email protected],
www.smith.umd.edu/lbpp/faculty/morici.aspx.