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With So Many Problems, Work Is Cut Out for the US

Friday, 02 July 2010 06:37 PM Current | Bio | Archive

The U.S. employment numbers show that the job market is further weakening.

The jobs picture in June was quite mixed as temporary census workers were laid off and private hiring rose moderately. Also, the unemployment rate continued to dip even as the workweek slipped.

Overall, payroll jobs in June fell 125,000, the biggest drop since October, after spiking a revised 433,000 in May and after a 313,000 jump in April. The June decrease matched the market forecast for a 125,000 decline. The latest figure fell short of analysts' projection for a 105,000 advance in private payrolls.

There are other signs of slowing in the labor market. Growth in average hourly earnings eased to a 0.1 percent decline, following a 0.2 percent boost in May. The average workweek for all workers edged down to 34.1 hours compared to 34.2 hours in May. The market forecast was for 34.2 hours.

The unemployment rate slowed to 9.5 percent in June from 9.7 percent in May. However, the decrease was due to a sharp drop in the labor force.

I expect the unemployment rate to move back to double digits before year’s end. Don’t forget, the United States needs job growth of a minimum 150,000 to keep the job force “stable.” We are still far from that. Unfortunately, a “double dip” isn’t off the table.

In the meantime, manufacturing activity was slower in most countries but nevertheless continued to expand in June. Only Greece, Hungary and South Africa registered a contraction. The slowdown in manufacturing comes at a bad time because the current recovery has largely been concentrated in the manufacturing sector. If growth in this sector slows, as it’s doing now, then there is really no sector ready to take over the growth baton.

Anyway, there is no doubt that manufacturing lost momentum around the world in June, which adds to worries that global economies are poised for “slower” growth in the months ahead.

So, where are we heading in the United States and elsewhere? Similar to spinning wheels that finally gain traction, global inflation risks stem from the tardy removal of unprecedented policy stimulus. It’s because of this that many G-20 governments are now beginning to ease back on the fiscal throttle.

However, acute judgment is required to avoid sinking back into the mud. Just as we saw divisions on this subject at the recent G-20 summit, it is inevitable that central bank committees will see similar discord on monetary policy.

At the Federal Open Market Committee, James Bullard and Thomas Hoenig have already expressed their fears for the inflationary risks posed by the FOMC’s long-held, lax policy stance, with the latter openly calling for it to abandon its pledge to keep interest rates low for an “extended period.”

Looking at Australia, and although I’m unaware of such (still small) divisions on the Reserve Bank of Australia’s policy committee, it is clear that recent data have given its members something to think about.

Having raised interest rates six times (postcrisis) in the face of a sound banking sector and an apparently robust economic recovery, there have been some unnerving signs of the latter’s weakening following the removal of government support. For example, approvals to build new homes in Australia fell 6.6 percent in May after an 11.4 percent fall in April – figures that came just a day after a 6.4 percent monthly drop was reported in new home sales in May.

The European Central Bank’s conduct of monetary policy is arguably of the more enigmatic variety with council members rarely deviating, at least in public, from a unified and impassive mantra.

So, as usual, we’ll have to wait and see what the central banks will do from here on.

In this context, we just got interesting food for thought from the Congressional Budget Office on the “Long-Term U.S. Budget Outlook.”

Yes, keeping deficits and debt from growing to unsustainable levels would require raising revenues as a percentage of GDP significantly above past levels, reducing outlays sharply relative to the CBO’s projections, or some combination of those approaches.

Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery.

However, the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt.

Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them.

We can say that the CBO’s projections understate the severity of the long-term budget problem because they don’t incorporate the significant negative effects that accumulating substantial amounts of additional federal debt would have on the economy: Large budget deficits would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment — which in turn would lower income growth in the United States.

Growing debt would also reduce lawmakers’ ability to respond to economic downturns and other challenges.

Over time, higher debt would increase the probability of a fiscal crisis in which investors would lose confidence in the government’s ability to manage its budget, and the government would be forced to pay much more to borrow money.

So, we’ll have to watch very closely which scenario the people in Washington are aiming at.

In the meantime, I don’t expect changes in monetary arrangements, but given that the day of reckoning for postcrisis policy prescriptions draws nearer, it will be interesting to the gauge the delineation of view among officials.

A legitimate question could be if I now believe that the dollar could or is losing some of its haven status among international investors? Not necessarily. After all, given the question marks that continue to hang over the euro’s status as a reserve currency, there are precious few alternatives other than the dollar.

Nevertheless, I will be keeping a close eye on U.S. data in the weeks ahead.

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The U.S. employment numbers show that the job market is further weakening. The jobs picture in June was quite mixed as temporary census workers were laid off and private hiring rose moderately. Also, the unemployment rate continued to dip even as the workweek slipped....
Friday, 02 July 2010 06:37 PM
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