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Spreading Layoffs, Sagging GDP
Second quarter GDP and the July employment report highlight this week’s economic data. The hiring data, reflecting business sentiment about future sales, are key indicators of where the economy is headed in the second half.
Thursday, the Commerce Department will report advanced estimates for second quarter GDP. The consensus forecast is for a 1.8 percent increase over the first quarter, thanks to surges in consumer spending and exports. Unfortunately, retail spending growth slowed in June and July, and the lift to exports provided by a weaker dollar may be flagging. Businesses remain pessimistic. Many are not replacing workers that leave, layoffs are widespread, and commercial construction has stalled.
The Labor Department July employment report, due out Friday, will likely provide a much better indicator of where the economy is headed in the second half than the GDP report.
Over the last six months, the economy lost 438,000 jobs. Manufacturing and construction shed 235,000 and 261,000 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 jobs report will have to confound forecasters, who are generally pessimistic, to show strong gains in employment.
Other key data this week will be consumer confidence, auto sales and construction spending. All have been heading down in recent months. Forecasters expect:
Tuesday—the Conference Board Index of Consumer Confidence to be unchanged from June
Friday—auto sales to be little changed from depressed June levels, and June construction spending to decrease 0.3 percent from May.
Thursday, the Commerce Department will release second quarter GDP, and the consensus forecast is for a 1.8 percent annual increase, up from 1.0 percent in the first quarter and 0.6 percent in the final quarter of 2007. However, the surge in consumer spending is already abating, and export growth may have run its course.
Economic stimulus tax rebate checks motivated stronger consumer spending in May, but this tapered off in June. A significant amount of the additional spending was concentrated in gasoline, food and other nondurable goods, as surging gasoline and food prices force consumers to focus on necessities. Absent was spending on furniture and automobiles, which would reflect stronger consumer confidence about the future.
Retailers are reporting a profits squeeze, as they face difficulties passing on to consumers higher wholesale prices for goods. Manufacturers will either have to find ways to absorb higher energy and material prices, by boosting productivity, or face shrinking sales.
Last week’s new and existing home sales reports indicated further weakness in the housing market and with so many unsold homes on the market, a recovery in residential construction appears many months away.
The weaker dollar against the euro and non-Asian currencies has given exports a boost; however, most of the recent growth has been in commodities and industrial materials, and an important element of that growth has been from higher prices, as opposed to increased shipments that generate more employment. Exports of capital goods have not grown since December 2007, reflecting the tough time U.S. exporters have penetrating still rapidly growing Asian markets.
The Jobs Data
The credit crisis, falling home and stock prices, the high cost of imported oil, and the growing trade deficit with China are hammering down demand for U.S.-made goods and services and forcing layoffs in many industries.
Broader job losses indicate problems in the financial and housing sectors are damaging the non-financial and non-energy sectors of the economy in ways that may take many months, even years, to repair. The economy is entering a period of much slower growth during the second half of 2008.
In Friday’s jobs report the key variables to watch are:
Jobs Creation. July 3, the Labor Department reported the economy lost 62,000 payroll jobs in June and shed an average of 73,000 jobs each month since December. The consensus forecast is that the economy lost 68,000 jobs in July. My published forecast is for a 60,000 decrease in employment.
Business vs. Government Payrolls. In June, government employment expanded by 29,000, even as overall payroll jobs contracted 62,000. This indicates the private business economy shed 91,000 jobs. Failing tax revenues are crimping state and local budgets, and some state and municipal governments are now beginning to trim payrolls.
Construction. In June, construction lost 43,000 jobs, and manufacturing lost 33,000 jobs.
Residential construction shed nearly 7000 jobs, while 36,000 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 164,100 jobs, while the balance of the construction industry lost 364,000 jobs. Commercial building construction has lost 31,600 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 30,100 jobs in May and June together. Even removing the automobile and parts dealers, employment was down 21,800. Retailers are anticipating a slow second half of 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 and June finance and insurance shed 14,200 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 99 months manufacturing has lost 3.8 million jobs. The dollar remains undervalued 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.
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 those jobs, and U.S. growth would exceed 3.5 percent a year. Growth is likely to be subpar, and average about 2 percent through the end of 2010.
PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.