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The Big Slump

Today, the Labor Department reported the economy lost 84,000 payroll jobs in August, after losing 60,000 jobs in July. This was much worse than was expected, as the full weight of banking crisis, rising oil prices and imports from China drive up unemployment.

Unemployment rose to 6.1 percent from 5.7 percent in July. Factoring in discouraged workers, unemployment is closer to 7.7 percent.

Hidden unemployment and wages lagging inflation make the economy the most important issue dogging Republican presidential nominee John McCain. Quite simply, ordinary Americans have not benefited from the strong GDP growth accomplished in recent years, and this gives Democratic candidate Barack Obama’s proposals to redistribute income a lot of traction. These will not much help ordinary workers two years from now but in the heat of a campaign, populist policies and promises enjoy strong appeal.

Governments added 17,000. Factoring out government employment, which is fairly steady in times of economic distress, the private sector bled 101,000 jobs.

Over the last eight months, the economy has lost 605,000 jobs. The banking crisis, subsidized fuel prices in Asia and protectionist policies in China and elsewhere are causing employers to relocate to Asia rather than endure the eminent U.S. economic slowdown.

These job losses, along with slowing activity in consumer spending and construction activity, indicate third quarter GDP growth will be significantly less than the 3.3 percent posted in the second quarter. The stimulus package tax rebates gave consumers a boost in May and June, but now consumers are trimming back. Gasoline prices, though easing still strain consumer budgets, car sales remain poor and skewed toward imports, and heating oil will be expensive this fall and winter. Overall, GDP growth should be about 1.4 percent in third quarter and slow further in the fourth quarter and the first quarter of 2009.

Inflation will come down with falling oil prices. With the banks in trouble, the Federal Reserve will not be raising interest rates anytime soon.

Wages and Unemployment

In August, wages increased a moderate 0.7 cents per hour, or 0.4 percent, and not enough to keep up with inflation. Moderate wage increases and strong labor productivity growth 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 a one-time pass-through from higher energy prices earlier this year, not permanent increases in inflation expectations.

The unemployment rate was 6.1 percent in August, up from 5.7 in July. 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 7.7 percent. As the economy slows further, this figure will likely exceed 9 or even 10 percent.

This hidden unemployment and poor inflation adjusted wage gains explain why the economy is such a hot issue in the presidential campaign despite the strong growth registered in the second quarter. Ordinary Americans are just not reaping benefits from the strong productivity and GDP growth accomplished in recent years. Perceptions that too many of the gains are falling into the hands of hedge fund traders, Wall Street bankers and rock stars have a solid foundation in the data.

Fewer adults working and declining real wages give Democratic candidate Barack Obama’s proposals to redistribute income a lot of traction. These policies will do little to correct the fundamental systemic problems that are destroying good jobs and squeezing middle class families, but they would make them feel better for a little while.

Going forward, solutions that create better jobs will require cutting the trade deficit by at least half to substantially boost the domestic manufacturing, solving the problems of the large money center banks to get mortgage money flowing and housing construction going again, and energy policies that more aggressively develop alternative fuel sources, conserve oil, and open up new domestic fields for conventional oil and gas production. Reducing dependence on foreign oil requires doing all things environmentalists want us to do and all things environmentalists don’t want us to do.

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 8,000 in August. This is a terrible indicator for future GDP growth. Retailing shed 20,000 thousand jobs, and financial services lost 1,600 jobs.

Over the first seven months of 2008, new residential construction was down 27 percent from the same period in 2007, and housing prices are about 20 percent off their peak. The major money center banks in New York and elsewhere cannot provide funds for conventional mortgages by bundling loans written by regional commercial banks into bonds for sale to insurance companies, pension funds and other fixed income investors. Until the conventional mortgage problem is fixed and government-sponsored Fannie Mae and Freddie Mac are put on a sounder footing, new home construction is not likely to recover, and construction employment will remain depressed.

Manufacturing has lost 84,000 jobs, and over the last 101 months, manufacturing has shed more than 3.9 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. Similarly, Beijing subsidizes fuel prices and increasingly requires U.S. manufacturers to make products in China to sell there.

Ending Chinese currency market manipulation and other mercantilist practices 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.

In addition, a robust U.S. policy to conserve domestic oil, develop new domestic oil and gas fields, and build out alternative energy technologies would greatly boost employment in both manufacturing and construction.

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.

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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PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

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