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Today, the Labor Department reported the economy lost 159,000 payroll jobs in September, after losing 73,000 jobs in August.
This was much worse than was expected, as the full weight of the banking crisis, the cost of imported oil and job losses to China bore down on manufacturing and the broader economy with unrelenting pressure. The United States has lost jobs every month since December, even as GDP and productivity have grown.
Congressional gridlock and presidential inaction on the trade deficit, energy and other issues are driving employers abroad, driving down stock prices and dashing the dreams of middle income Americans. Wrong headed regulation of the financial sector, drives financial jobs abroad but does not protect Americans from the destructive abuses on Wall Street.
Unemployment was steady at 6.1 percent September. Factoring in discouraged workers, unemployment is closer to 7.9 percent.
Quite apart from the banking crisis, hidden unemployment and wages lagging inflation would make the economy the most important issue dogging Republican presidential nominee John McCain in the closing month of the campaign. Quite simply, ordinary American are not benefitting from the strong economic growth accomplished in recent years, and with housing prices and retirement accounts dropping in value, this gives Barack Obama’s proposals to redistribute income a lot of traction.
Equally troubling, since 2000, corporate profits have jumped sharply but stock prices were down, even before the subprime mess of recent weeks took them to new depths. The fact is most of the gains have gone to private equity funds, hedge funds, investment bankers, executive buyouts, and the financial engineers that run the deals. These put together firms, take them a part, get paid up front, extract billions in shareholder value, and then leave shareholders with vague promises about future synergies and depressed stock prices.
Worse, the wizards of Wall Street leave companies too poor to take care of their workers decently. Like the Flim Flam Man in the George C. Scott classic, the con artist is in the next county before the ruse becomes visible, and ordinary Americans are left with vanished dreams in their retirement accounts and prospects of a mean old age.
Obama’s tax and redistribute policies will not resurrect jobs, wages or the price of stocks in American retirement accounts. Ordinary Americans who have to earn their livings outside the cosseted confines of Wall Street will be not much better off two years from now. In fact, Obama’s policies may make economic conditions worse. However, middle class distress gives populist promises enjoy strong appeal. If Obama wants to make Americans better off, he would serve them better by straightening out the banks and taking substantive action on the trade deficit with China. Also, he would be less politically correct on energy and the environment. His platform is full of platitudes and generalizations but not enough substance.
McCain does not offer much more, and in some cases he promises less.
Governments added 9,000 jobs. Factoring out government employment, which is fairly steady in times of economic distress, the private sector bled 168,000 jobs.
Over the last eight months, the economy has lost 760,000 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 2.8 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 are poor and skewed toward imports, and heating oil will be expensive this fall and winter. Overall, GDP growth should be near zero in the third quarter, and turn negative in the fourth quarter and first quarter of next year.
The Federal Reserve may cut interest rates soon, but that will not do a lot of good. What is needed and Ben Bernanke is not inclined to advocate, is a cleanup to go with the bailout of Wall Street.
Wages and Unemployment
In September, wages rose a moderate 0.0 cents per hour, or 0.2 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 September, the same as in August. 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 7.9 percent. As the economy slows further, this figure will likely exceed 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 35,000 in September. This is a terrible indicator for future GDP growth. Retailing shed 40,000 thousand jobs, and financial services lost 11,000 jobs.
Manufacturing has lost 51,000 jobs, and over the last 102 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. Neither President Bush nor Congressional leaders like Charles Rangel and Chuck Schumer have been willing to seriously challenge China on this issue, and Senators McCain and Obama appear comfortable with continuing their approaches.
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.