Last week's May jobs numbers were bad news, regardless of how you look at them. Job growth over the last three months has averaged slightly less 100,000 a month, roughly the pace needed to keep pace with labor force growth. The unemployment rate ticked up to 8.2% and the employment to population ratio is still just 0.4 percentage points above its trough for the downturn. And real wages almost certainly declined in May.
However bad this story is, the usual gang of pundits cited in the media had their usual burst of over-reaction. There were many talking of a worldwide slowdown and a possible recession. This is a serious misreading of the jobs report and other recent economic data.
The main story of the apparent weakness of the last three months is the apparent strength of the prior three months. In other words, the story is still the weather. The relatively strong growth in jobs and other measures that was the result of a relatively mild winter meant that we would see weaker growth than normal in the spring.
"Firms create jobs when they have more demand, not because we are nice to their rich owners."
If companies hire people because demand picked up in February rather than April, then they will not be doing as much hiring in the spring as would ordinarily be the case. The same story applies to consumer demand. Families that took advantage of unusually mild winter weather to buy a car in January or February don't go out and buy another one in the spring.
The weak job growth of the last few months will not persist. The underlying rate of growth of the economy is still in a 2.5-3.0% range. Investment in equipment and software is likely to continue to rise at close to a double-digit rate. House prices have finally stabilized nationally, and some of the hardest hit cities like Phoenix and Miami are even seeing a mini-boom.
The chaos and recession in the eurozone are a drag on growth in the United States, as is the slower growth that seems to be facing China. But exports to the European Union are less than 2.0% of GDP and exports to China are less than 0.8% of GDP. Even large dropoffs in these categories of demand will have only a limited impact on growth. This is not the story of recession.
The excessive negativism matters for the same reason that it mattered last summer, when the double-dip crowd was ranting about the weak economic numbers in the spring of 2011. Creating an overly negative view of the economy lays the basis for excessive optimism, as we saw last fall, when the recovery was actually following an extremely mediocre course.
These swings from excessive pessimism to excessive optimism, and back again, are preventing the public from understanding the real picture of the economy – which is, in fact, awful. This is like baseball fans standing up and cheering wildly when their pitcher throws a strike, then falling into despair when the next pitch is a ball, ignoring the fact that their team is losing 12-0.
The discussions of the economy have lost sight of the basic score. The US economy is operating at close to 6% below its potential with employment down by almost 10 million compared with its trend level. This is an incredible waste of resources. It is also devastating to the unemployed workers and their families.
The basic story of this downturn remains incredibly simple. We lost close to $1.4tn in annual demand when the housing bubble collapsed. The construction boom that was fueled by the bubble went into reverse, with new construction falling to its lowest levels in more than 50 years. The consumption boom fueled by the bubble-generated equity collapsed when that equity disappeared.
We cannot return to full employment until we have something to replace the demand that had been generated by the housing bubble. This is simple arithmetic.
Unfortunately, both parties in the United States refuse to talk about filling the hole created by the collapse of the housing bubble in a serious way. The Republicans talk about giving everything to "job creators", with the idea that if we are generous enough to the rich (with tax cuts), they will show their gratitude by creating jobs. There is zero evidence to support this view. Are we supposed to believe that investment will somehow increase by 50% as a share of GDP just because we are nice to rich people?
The world doesn't work that way. Firms create jobs when they have more demand, not because we are nice to their rich owners.
President Obama and the Democratic leadership have refused to put forward a serious alternative path. While they have been willing to argue that rich people should have to pay some taxes, they have not come to grips with the nature of this downturn, as if hoping that, somehow, the economy will just jump back to its pre-recession level of output through some magical process. There is no magic that will allow the economy to override basic arithmetic. In the short term, only the government can provide the boost necessary to support the economy. Over the longer term, we will need to get the trade deficit down through a more competitive dollar.
It's a simple story. But as long as people are obsessed with short-term, weather-induced fluctuations, we will not see a serious discussion of the underlying state of the economy.