Smith Faculty Opinion Article

By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

May 1, 2008

Labor Department Releases Key April Jobs Data Friday
The United States Headed for Economic Malaise?

The Labor Department will report employment data for April on Friday. This is a key indicator of the depth and duration of the economic slowdown, which began in the fourth quarter.

First quarter GDP, which measures the production of goods and services in the United States, registered modest growth but was supported by a large build up of inventories. Goods produced but unsold were counted in first quarter GDP; however, these will pull down second and third quarter GDP growth, likely into negative territory, when retailers, auto companies and other manufacturers clear out unwanted supplies.

If the payroll jobs decline for a fourth straight month, it will be hard to deny that the economy has entered a period of economic malaise—halting growth interrupted by periods of contraction—of difficult to predict duration.

Unlike post-World War II recessions, the current malaise is caused by a crisis of confidence among fixed income investors, such as insurance companies and pension funds, in the integrity and solvency of the major Wall Street banks. The rapid decline in the market value of mortgage-backed bonds issued by these banks, and erosion in the balance sheets of the major banks caused by the declining value of unsold bonds on their books, represents a modern day run on the banks, which has required the Fed to lend the banks sums totaling about 4 percent of GDP.

Further job losses would indicate problems in the financial sector are damaging the real economy in lasting ways that will take many months, even years, to repair. The Administration, predictably, counsels calm, but apathy toward prompt movement to repair damage caused by the shut down in bank access to the fixed income market to raise funds has made credit more difficult to obtain for many sound businesses. Even as the Fed cuts interest rates and pumps up the balance sheets of banks, business loans contract and layoffs escalate throughout the economy.

Other structural problems, like the growing trade deficit with China and runaway oil prices, are further hampering prospects for employment growth. Unfortunately, the Administration’s responses to these problems have been tepid and encouraged pessimism among consumers and businesses about the economic outlook. Predictably, consumers are reluctant to spend and businesses cut hiring and layoff workers adding to the prospects of an employment death spiral.

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

Jobs Creation. April 4, the Labor Department reported the economy lost 80,000 payroll jobs in March, after losing 80,000 and 76,000 jobs in January and February, respectively. In addition, retail sales have been weak and inventories of unsold goods have been building, indicating the housing and credit crisis are causing a general contraction to spread to most of the rest of the economy. Second quarter GDP growth will likely be weak or negative.

The consensus forecast is that the economy lost 75,000 jobs in April. My published forecast is for a 60,000 decrease in employment.

Unemployment. In March, unemployment, as statistically estimated by the Labor Department, rose to 5.1 percent from 4.8 percent in February. For April, this figure is expected to edge higher to 5.2 percent.

Since President Bush took office, adult participation in the labor force has been declining 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 6.9 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count.

Private Sector Payrolls. In March, government employment expanded by 18,000 even as overall payroll jobs contracted 80,000. This indicates the private business economy shed 98,000 jobs. It is difficult for the public sector to continuing expanding if the tax base—the private sector economy—is contracting. Further contraction in private sector employment in April would indicates that job losses for the entire economy will accelerate as we move through 2008, and the economy may be headed for more than a mild recession but rather an extended period of stagnation.

Construction. Historically, manufacturing and construction offer workers with only a high school diploma the best pay, benefits and opportunities for skill attainment and advancement. Troubles in these industries push ordinary workers into retailing, hospitality and other industries where pay often lags. These phenomenon at are the heart of middle class and blue collar discontent that color the economic debate in the presidential primaries.

Manufacturing Employment. In March, manufacturing lost 80,000 jobs, and over the last 96 months manufacturing has shed 3.7 million jobs.

The growing trade deficit with China and other Asian exporters is a key factor. Were the trade deficit cut in half, manufacturing would recoup at least 2 million of those jobs, U.S. growth would exceed 3.5 percent a year, household savings performance would improve, and borrowing from foreigners and the federal budget deficit would decline.

The dollar remains too strong against the Chinese yuan, Japanese yen and other Asian currencies. The Chinese government artificially suppresses the value of the yuan to gain competitive advantage, and the yuan sets the pattern for other Asian currencies. These currencies are critical to reducing the non-oil U.S. trade deficit, and instigating a recovery in U.S. employment in manufacturing and technology-intensive services that compete in trade.

To affect this policy, China intervenes in currency markets, selling yuan for dollars and other western currencies at a discount from a market determined price. In 2007, this intervention reached $461 billion or 44 percent of China’s exports. Ben Bernanke has correctly characterized these as an effective subsidy on exports.

Sadly, Treasury Secretary Henry Paulson, in a recent speech to the Economics Club of Chicago, expressed the view that the employment situation in manufacturing is healthy and characterized as protectionist substantive efforts to redress exchange rate problems with China, proposed by Administration critics in Congress. With such apathy from the Administration and contempt expressed by Paulson for those who differ with him on appropriate tactics, it is small wonder that blue collar workers and their unions question the efficacy of U.S. trade policy.

A crisis of confidence has emerged regarding the conduct of U.S. trade policy, and the Republican Administration and Democratic majority in Congress ignore it at peril of the nation.

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