Smith Faculty Opinion Article	November 3, 2006
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

Economy Added 92,000 Jobs in October
Risk of Stagflation Rising

Today, the Labor Department reported the economy added 92,000 payroll jobs in October. The consensus forecast was 125,000.

The revised figure for September jobs growth was 148,000 up from 51,000.

In the third quarter, the economy added 150,000 payroll jobs per month, and October jobs growth was decidedly below that of recent months.

Overall, employment is growing more slowly than in the third quarter, when GDP growth was a disappointing 1.6 percent. At the October pace of jobs creation, unemployment will likely rise in the months ahead, and the probably that the economy will skip into recession has grown significantly.

Separately, the household survey, which includes the self employed, showed a sharp increase in employment and the unemployment rate falling from 4.6 percent in September to 4.4 percent in October.

Differences between the payroll data and household survey likely indicate that many people who have been displaced from positions with regular employers have sought refuge in home-based consulting and blue collar pickup jobs. It is unlikely that the self-employed sector is vibrant enough to provide attractive prospects for so many workers with the economy growing at a about a 2 percent annual rate over the last two quarters. Many of the newly self employed are merely underemployed day workers.

The adult labor force participation rate remains well below its first quarter 2000 level. Were the same percentage of adults seeking employment today as in 2000, unemployment would be about six percent.

In October, wages were up 0.4 percent or at about a 4.3 percent annual pace, indicating inflationary pressures from the labor market are increasing.

Recession risks are rising, and inflation remains stubbornly high. Stagflation is threatening to grip the economy.

Outlook for Fed Policies and Stock Market

The Federal Reserve is on the horns of a dilemma. Inflation remains stubbornly high, and growth has slipped to the point of threatening recession. Until the balance of risks tips more toward inflation or recession, expect no change in Federal Reserve interest rate policy.

Falling oil prices and slowing growth should slow inflation; however, the skewed labor market is pushing up compensation for highly skilled workers. The inflationary effects of gains for those at the top overwhelm restraint on wages and benefits for most other workers.

Falling gasoline prices should lift growth, and adjustments in housing prices have been modesthome equities are still up about 50 percent over the last five years. However, the parking lots full of unsold vehicles at General Motors, Ford and Chrysler indicates third quarter GDP growth was actually less than the Department of Commerce estimated, and the pessimism that haunts the housing market is throwing cold water on consumer expectations.

As the Domestic Three work off inventories of unsold vehicles, growth should rebound, but the nagging effects of a trade deficit, which subtracts six percent from GDP, continues. The trade deficit has shaved a percentage point from growth each of the last five years, and it will continue to tip the economy toward moderate but unspectacular growth. Thanks to the trade deficit, the economy has and will continue to under-perform its potential.

Modest growth, steady interest rates, and falling energy prices should be good for corporate profits and stock prices. Many large multinational corporations like Caterpillar and IBM earn significant profits abroad, even as they walk away from their workers at home, and stockholders capital gains and dividends should outperform workers wages.

Generally, corporate earnings reports have been good, and prospects for 2007 are promising. The stock market should regain its footing, and recent Big Cap stock gains should spread to the broader market.

A Fractured Labor Market and November Elections

Conditions in labor markets remain painfully uneven. Manufacturing has been particularly hard hit. Having lost more than 3 million jobs since 2000, manufacturing shed another 39,000 jobs in October.

Job losses in manufacturing tax the quality of employment prospects and wages for workers without a college degree or post-high school technical training. Many of these lost jobs are in contested congressional districts that form the ridge line between red and blue America from western New York and Pennsylvania through Michigan and the upland South along the Ohio Valley. This combination of economics and geography explains why Republicans will likely lose control of the House of Representatives.

Workers with key technical skills, for example in commercial construction, finance, information technology, and health care, enjoy good opportunities, but workers with only high school or a few years of college, without key technical skills, face difficulties finding jobs offering good pay and health benefits. Incumbents in Congress have offered little hope that the health care crisis, threatening ordinary working families and small and mid-sized employers, will be resolved.

The two-tiered labor market continues. The top quartile has it great, enjoying rising pay and solid health care plans, but for everyone else, the future is troubling. Slowing GDP growth will accelerate cutbacks in health care benefits, and falling home prices will erode the backstop home equities provide to living standards.

The skewed distribution of opportunities and rewards explains why President Bush cannot convince a majority of Americans the economy is headed in the right direction, and Republicans have a better plan for keeping the economy growing robustly and fairly.

All this exacerbates electoral troubles for Republicans created by the war in Iraq, deficit spending and ethics scandals. A strong economy and vibrant labor market would cause many voters to discount, somewhat, other concerns.

For many Americans the labor market and falling housing prices inspires only frustration and the specter of vanished dreams. Frustrated working Americans will express their angst on Election Day.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.