Greg Ip

Articles by The Economist’s U.S. Economics Editor

The economy and employment: On the turn?

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The original article is linked here.

The economy and employment

On the turn?

Jul 9th 2009 | WASHINGTON, DC
From The Economist print edition

The gloom about jobs is overdone, but the outlook remains tenuous

AFTER ebbing steadily since the start of the year America’s monthly job losses figure abruptly jumped from 322,000 in May to 467,000 in June, deflating talk of an imminent exit from recession. Hand-wringing in Washington quickly followed. On July 5th the vice-president, Joe Biden, admitted that the White House had “misread how bad the economy was”. In January it had predicted that unemployment would peak at 9% without a fiscal stimulus and 8% with one. The $787 billion two-year stimulus is now law but unemployment stands at 9.5% and Barack Obama admits it will probably top 10%.

At one level, the hand-wringing is overdone. The economy is doing a bit better than June’s employment report suggests. Jim O’Sullivan of UBS argues that the early date on which the job-market survey was done, combined with fewer than usual summer jobs for students, exaggerated the weakness. He notes that stockmarkets, home sales and consumer confidence are all showing the gradual improvement typical of turning-points. The deep freeze in the financial markets is thawing: issuance of stocks and corporate bonds hit $338 billion in the second quarter, according to Thomson Reuters, the highest for a year.

The odds are that the economy will begin to grow again in the current quarter for two reasons: the dramatic inventory liquidation, which led manufacturers to slash output and payrolls starting in late 2008, seems to be ending; and the impact of the fiscal stimulus is growing. Other countries, who bore much of the brunt of the inventory liquidation because they provide such a large share of what Americans consume, are already benefiting. Global manufacturing expanded in June for the first time since May 2008, according to a global purchasing-managers index compiled by JPMorgan (see chart).


But caution is still justified. A self-sustaining recovery needs more than just replenishing inventory and government stimulus; it requires a virtuous circle of increasing consumer spending and incomes, and there is still no evidence of that. Sales of cars remain disappointingly meagre. Consumer income is in a vice: not only are jobs and hours shrinking, but hourly pay grew at only an annualised rate of 0.7% during the past three months, the lowest since the data begin in 1964. Jan Hatzius of Goldman Sachs predicts wages will actually start falling next year.

If later this year the recovery still looks likely to remain feeble as the maximum impact of the stimulus is felt, pressure for more stimulus will grow. But it will be harder to deliver than last time. The Federal Reserve cut short-term interest rates in effect to zero in December, then embarked on “quantitative easing” in March by buying bonds with newly printed money. Treasury yields dipped at first, then more than rebounded, because some investors worried that the Fed’s radical actions would eventually fuel inflation.

As for fiscal policy, on July 7th Laura Tyson, an adviser to Mr Obama, called for a second stimulus, saying the first is “a bit too small.” Mr Obama has demurred, arguing the first needs time to work. Polls also show the deficit is now a bigger priority with voters than more stimulus.

Mr Obama himself has proposed a budget-balancing rule that he would have to break to inject more stimulus—a formality, perhaps, but one that would further erode his fiscal credibility given the gargantuan deficits his policies will produce even beyond 2010. “We could afford to borrow a bit more over the next year if we had a plausible plan to get the deficit under control thereafter,” says Len Burman of the Urban Institute, a think-tank. “But nobody has articulated such a plan.”


Written by gregip

July 9, 2009 at 8:35 pm

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