The Real Story Behind Job Creation
March's job numbers were greeted rapturously by the business press. Scratch the surface of the data and things are not so rosy
When the labour department announced that the US economy had created 216,000 jobs in March, it set off a round of celebrations throughout Washington policy circles. The word in the New York Times, the Washington Post and other major news outlets was that the economy was back on course; we were on the right path.
Those who know arithmetic were a bit more sceptical. If the economy sustained March's rate of job growth, it will be more than seven years before we get back to normal rates of unemployment. Furthermore, some of this growth likely reflected a bounceback from weaker growth the prior two months. The average rate of job growth over the last three months has been just 160,000. At that pace, we won't get back to normal rates of unemployment until after 2022.
That's a long time to make ordinary workers suffer because the folks who run the economy are not very good at their job.
In addition to the job growth numbers, the March data also showed that the unemployment rate slipped down by another 0.1 percentage point. It now stands at 8.8%, almost a full percentage point below its year ago level of 9.7%. This, too, was treated as cause for celebration. While that may sound like progress, a more careful look at the data makes this number less impressive. The percentage of the population that is employed has actually fallen by 0.1 percentage point over the last year.
In order to be counted as unemployed, you have to say that you are looking for work. The unemployment rate did not fall because the unemployed had found jobs; rather, the unemployment rate fell because people have given up looking for work. Only in Washington would this be hailed as good news.
Remarkably, as the mixed basket of economic news in the March employment report was being celebrated, a major piece of unambiguously bad news was almost completely ignored. The commerce department released data on construction spending for February (pdf).
A decline of 1.4 % in spending in February, coupled with sharp downward revisions to the data for the prior two months, left nominal spending in February 6.2% below its November level. The slump in construction is virtually certain to be a major drag on growth in the first quarter. The big culprit this time is the non-residential sector – as a result of the bursting of the bubble in this sector, coupled with a fading out of stimulus spending on government projects.
Other recent economic news also suggests that the economy's momentum is more likely to slow than accelerate in the months ahead. Nominal wage growth has been virtually flat the last two months. With food and gas prices rising sharply, this means that real wages are falling, leaving workers with less money to spend.
House prices are again falling rapidly, having declined at the rate of 1.0% a month for the last three months. If this pace of decline continues, by the end of the year, homeowners will have lost more than $2tn in equity compared with peak hit in the summer of 2010. This loss of housing wealth implies a reduction in annual consumption of $120bn.
There was also a big jump in the trade deficit reported for January. While the celebrants of recent trade pacts were excited by the growth in exports, people who know economics recognise that the larger increase in imports will be another drag on economic growth. With most of the country's major trading partners experiencing weak growth, there is little prospect for an improvement in the trade deficit any time soon.
And, investment in equipment and software also appears to be weakening. New orders for capital goods (excluding volatile aircraft orders) in February were down 6.8% from the levels reported in December. In addition, the government cutbacks, threatened at the federal level and going into place at the state and local level, will be a further source of drag on the economy.
In short, there is little basis for last Friday's celebrations about the economy. The February jobs report would have been mediocre if the economy were already at normal rates of unemployment. In the context of a badly depressed economy, it is pathetic. We should be seeing jobs growth at two or three times this rate.
But the real bad news is that it is more likely to get worse than better. Yet again, the business press is missing the story.
© Guardian News and Media Limited 2011