Smith Faculty Opinion Article

Peter Morici By Dr. Peter Morici, Professor of International Business
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July 30, 2008

What to look for in Thursday’s GDP and Friday’s Jobs Report

Thursday, the Commerce Department is expected to report GDP grew more robustly in the second quarter than during the previous six months, thanks to a surge in consumer spending and exports. These are likely spent forces, and growth will be slower in the second half of 2008. Employers remain pessimistic, as freezes on replacement workers and layoffs are widespread throughout the economy.

Friday, the Labor Department will report employment data for July. In June, the economy lost 62,000 jobs, and the consensus forecast is for another 75,000 jobs lost in July. Over the last six months, the economy lost 438,000 jobs. Manufacturing and construction shed 235,000 and 261,000 jobs, respectively, and in recent months, layoffs spread to finance and retail sales. If the economy is to pick up in the second half, the Friday jobs report will have to confound forecasters, who are generally pessimistic.

Key Data to Look for in the GDP Report

Thursday’s GDP report will provide the initial or advance estimate of second quarter GDP. The number most frequently cited is the quarter-over-quarter change, compounded to an annualized rate. Economists are forecasting a 1.8 percent increase in second quarter GDP, up from 1.0 percent in the first quarter and 0.6 percent in the final quarter of 2007.

Table 2 of the press release breaks down the contributions to GDP of those items of spending you learned about in Econ 101: Consumption, Investment, Government, and Exports less Imports (a positive contribution from imports indicates fall in real, inflation-adjusted imports).

Look at the contributions of consumption, especially nondurable goods and services. Those contributions to GDP growth are likely to be large, while the contribution of investment will be smaller or negative.

Consumption likely contributed so much to growth in the second quarter, because the tax rebate checks caused a surge in May retail sales and consumer spending. A good deal of that money was saved and could have been spent in June and ensuing months, but preliminary data for June and July indicate retail sales and consumer spending are tailing off. Also, higher fuel and food prices absorbed a lot of what people chose to spend.

Next, look at the export and import numbers. Exports have been driven up by strong demand for commodities and capital goods. Growth is slowing globally, demand and price increases will abate for commodities, and demand for capital and consumer durables goods is likely to slow.

Also, governments in the still big growth markets of China and other Asian juggernauts are more interested in strong-arming Intel, GM and others into opening high-tech factories inside their markets than letting U.S. firms ship in components or assembled goods, no matter how competitive they may be against European products handicapped by a strong euro. If Washington doesn’t fix that problem, you might better plant peas in December and expect frozen Bird’s Eye packages in your garden next April than count on a strong contribution from exports to GDP growth into 2009.

Real imports tailed off a bit in the first quarter, because the growth in consumer spending slowed markedly and higher oil prices somewhat constrained demand for foreign petroleum. In the second quarter, the net contribution of imports to GDP is uncertain but likely to be small or negative because of stronger imports from China, aided by China’s currency trading subsidies.

The contribution of domestic investment spending to GDP growth is likely to be small or negative, as housing and commercial construction tail off, and firms replace computers and software but not a lot else. The government sector may provide a small positive contribution to growth, but it will be under pressure during the second half from falling home values and property taxes, and flagging corporate and capital gains taxes.

The bottom line, don’t look for consumers and exports to hold up the economy the second half, and investment and government spending are unlikely to make up the difference. The economy could contract. That’s negative GDP growth in the language of the numbers during either or both the third and fourth quarters.

Key Data to Watch in Friday’s Employment Report

The credit crisis, falling home and stock prices, the high cost of imported oil, and the growing trade deficit with China are hammering down demand for U.S.-made goods and services and forcing layoffs in many industries.

Broader job losses indicate problems in the financial and housing sectors are damaging the non-financial and non-energy sectors of the economy in ways that may take many months, even years, to repair. The economy is entering a period of much slower growth during the second half of 2008.

In Friday’s jobs report the key variables to watch are:

Jobs Creation. July 3, the Labor Department reported the economy lost 62,000 payroll jobs in June and shed an average of 73,000 jobs each month since December. The consensus forecast is that the economy lost 75,000 jobs in July. My published forecast is for a 60,000 decrease in employment.

Unemployment. In June, the unemployment rate, as computed by the Labor Department, was 5.5 percent, and is expected to rise to 5.6 percent for July.

Since President Bush took office, more adults have chosen not to seek employment owing to worsening labor market conditions. If labor force participation today were at the same level as when President Bush took the helm, the unemployment rate would be about 7.2 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count when computing the unemployment rate.

Business vs. Government Payrolls. In June, government employment expanded by 29,000, even as overall payroll jobs contracted 62,000. This indicates the private business economy shed 91,000 jobs. Failing tax revenues are crimping state and local budgets, and some state and municipal governments are now beginning to trim payrolls.

Construction. In June, construction lost 43,000 jobs, and manufacturing lost 33,000 jobs.

Residential construction shed nearly 7000 jobs, while 36,000 jobs were lost in nonresidential buildings, roads and other infrastructure projects. This has been a persistent pattern for many months. Notably, since residential construction employment peaked in September 2006, that sector has lost 164,100 jobs, while the balance of the construction industry lost 364,000 jobs. Commercial building construction has lost 31,600 jobs.

Those losses indicate the housing recession, credit crisis, high oil prices, and China trade deficit are infecting the long-term growth prospects of the entire U.S. economy. American businesses are simply not hiring or building for the future in the United States, and this bodes poorly for GDP growth in the second half of 2008 and beyond.

Retailing. Despite the May and June bursts in retail sales, retailing and nonautomotive retailing lost 30,100 jobs in May and June together. Even removing the automobile and parts dealers, employment was down 21,800. Retailers are anticipating a slow second half of 2008 and are trimming store staff to limit their losses.

Finance and Insurance. During the economic expansion finance and insurance, along with technology sectors offered some of the best new job opportunities, outside of health care and technology-related activities. In May and June finance and insurance shed 14,200 jobs.

It’s not just the U.S. credit crisis. U.S. financial services are facing tougher competition in booming markets, like the Persian Gulf, where the U.S. credit meltdown has tarnished the image of U.S. service providers like Citigroup. Increasingly U.S. investment banking firms cannot demand premium high prices for their services, as sophisticated buyers prefer local, more reasonably-priced and less-tarnished competitors.

Manufacturing. Over the last 99 months manufacturing has lost 3.8 million jobs. The dollar remains undervalued against the Chinese yuan and other Asian currencies, and the large trade deficit with China and other Asian exporters is a key factor pushing down U.S. manufacturing employment.

To keep the value of the yuan low against the dollar policy, the Chinese government intervenes in currency markets, selling yuan for dollars and other western currencies at a discount from a market determined price. In 2008, this intervention is exceeding $500 billion, 15 percent of China’s GDP and 35 percent of its exports of goods and services.

Many U.S. manufacturers find it easier to locate production in China and other Asia locations than add jobs in the United States to produce goods. U.S. made goods must scale considerable trade barriers and compete against subsidies provided by undervalued currencies in China, India and elsewhere in Asia and regulated fuel prices.

U.S. manufacturers have received little encouragement from the Bush Administration, and in particular Treasury Secretary Henry Paulson, that it will do much to level the playing field in Asia.

Were the trade deficit cut in half, manufacturing would recoup at least 2 million of those jobs, and U.S. growth would exceed 3.5 percent a year. Growth is likely to be subpar, and average about 2 percent through the end of 2010.  

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