Smith Faculty Opinion Article

Peter Morici By Dr. Peter Morici, Professor of International Business
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May 7, 2009

Friday’s Jobs Report: Look to Retail Employment for Signs of Turnaround, Unemployment Headed Above 9 Percent

Friday, the Labor Department will report employment data for April. In March, the economy lost 663,000 jobs, and the consensus forecast is for another 620,000 jobs lost in April. My forecast is for a 630,000 loss.

Unemployment should reach 8.8 percent, and by my forecast, is headed for 9.3 percent before the end of 2009. Factoring in workers that have left the workforce and those who work part time but would prefer full-time jobs, the unemployment rate is greater than 16 percent.

From December 2007 through March 2009, the economy lost 5.1 million jobs. Construction and manufacturing shed 1.1 million and 1.5 jobs, respectively, as the credit market meltdown and trade deficit wrecked havoc on residential construction and manufacturing. In more recent months, layoffs spread to commercial construction, finance, retail sales, and other sectors.

The economy contracted at more than a 6 percent annual rate in the fourth quarter of 2008 and first quarter of 2009. By summer, residential construction and business investment should bottom. Many analysts saw first quarter surge in consumer spending as a hopeful sign of economic recovery.

However, most of the first quarter consumer spending gains came in January—February and March were weak. Retail employment fell in February and March, and store jobs should rebound in the April data if consumers are rushing out to the malls again.

The stimulus package should raise GDP by 2 percentage points in 2010 and 2011 and add about 3 million jobs. Most of these jobs will be temporary, and 3 million jobs will not be enough to replace the more than 6 million that will be lost before the recession ends.

Unless the Obama Administration addresses the structural problems that caused the crisis—management issues at the big banks and huge trade deficits on oil and consumer goods from China—the economy will slip back into recession once the stimulus spending is done.

Simply, as the economy expands, the businesses will struggle to find capital to expand, and the trade deficits on oil and consumer goods from Asia will balloon. These will create a shortage of demand for U.S. goods and services and new layoffs once the stimulus spending ends.

Treasury Secretary Timothy Geithner and National Economic Policy Director Lawrence Summers have not indicated they recognize the need for a fundamental change from Bush Administration policies to address these issues.

Timothy Geithner, as President of the New York Federal Reserve, was one of the principal architects of the Bush Administration’s bank bailout policy, including the workouts at Citigroup and AIG. Unveiled in February, the Financial Sector Stabilization Plan is vague and closely resembles the policies pursued by his predecessor, Henry Paulson. Subsequent announcements have failed to indicate a focused understanding of the problems in banking and a confident path to solutions.

The trade deficit, which at the peak of the economic expansion exceeded 5 percent of GDP, is a huge drain on demand for U.S.-made goods and services. Imports exceeding exports by 5 percent require Americans to consume 105 percent of what they produce to keep the economy going. Essentially, China, Saudi royals and other foreign sovereigns and private investors have been buying the bonds that permit Americans to borrow to consume more than they produce.

Oil imports and trade with China account for 90 percent of the trade deficit. President Obama’s energy policies address mostly the more efficient use of domestic coal and natural gas and alternative energy sources to generate electricity, and will do little to quickly reduce oil imports.

President Obama, like George Bush, is emphasizing diplomacy to persuade China to stop subsidizing exports, undervaluing its currency through currency market manipulation and blocking imports. It is unlikely that Hillary Clinton will be any more successful in prying open China than was Henry Paulson.

In addition to opposing genuine bank reform, the New York banking establishment opposes upsetting China on trade, because it hopes to expand its presence in the Middle Kingdom once the credit crisis passes. Being heavily invested in the auto industry and receiving significant investments from Middle East oil exporters, New York banks are not strong advocates of aggressive policies to reduce U.S. oil import dependence.

The multiple connections between the New York Federal Reserve Bank, Treasury and White House, on the one hand, and Goldman Sachs and other big New York banks, on the other hand, create conflicts of interest within the Obama Administrations, and may explain its jaundiced views banking, energy and trade policies

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

Jobs Creation. April 3, the Labor Department reported the economy lost 663,000 payroll jobs in March, 2.0 million jobs in the third quarter and 5.1 million since December 2007. My forecast is for a 630,000 loss in April.

Even if the economic contraction slows in the second and third quarters, job losses in the range of 500,000 appear likely for the next several months. We will not see the worst of things until summer. Job losses could top 6 or 7 million before the hemorrhaging ends.

The economy continued to contract at a 6.1 percent annual pace in the first quarter. The numbers would have been much worse but for a January surge in consumer spending.

Weak data for consumer spending and retail sales in February and March, notwithstanding, some analysts believe consumer activity has been stronger than Commerce Department reports indicate. They expect Commerce to eventually revise retail sales data upward.

In February and March, the retail sector continued to bleed jobs, and if consumer spending is indeed strengthening, April retail jobs figures should show a gain and point to recovery.

Unemployment. In March, the unemployment rate, as computed by the Labor Department, was 8.5 percent, and is expected to rise to at least 8.8 percent for April. According to my forecast, unemployment will reach 9.3 percent by the end of 2009.

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 11 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count when computing the unemployment rate. Add in part-time workers who would prefer full-time employment, and the hidden unemployment rate is above 16 percent.

Business vs. Government Payrolls. In March, government employment dropped by 5,000, as overall payroll jobs contracted 663,000. This indicates the private business economy shed 658,000 jobs.

Construction. In March construction lost 305,000 jobs. Since construction employment peaked in September 2006, the sector has lost 1.2 million 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 2009 and beyond.

Productive assets not put in place during the recession will not be available to produce goods and services after the slump ends. The U.S. economy will be on a permanently lower growth path thanks to mismanagement of the credit crisis, energy policy and trade with China and other Asian developing countries pursuing mercantilism strategies.

Retailing. Retail trade has shed 697,000 jobs since November 2007, and lost 51,000 jobs in February and 48,000 jobs in March. Again look for a jump in retail employment if the recession is ending.

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. Since December 2007, finance and insurance has shed 243,000 jobs, and 25,000 in March alone.

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 108 months manufacturing has lost 5.0 million jobs. The dollar remains overvalued 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. The yuan is at least 40 percent undervalued, and provides a like amount subsidy on Chinese exports into the United States and on Chinese products competing with U.S. exports in China and other markets around the world.

Many U.S. manufacturers find it easier to locate production in China and elsewhere in Asia than to 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.

Were the trade deficit cut in half, manufacturing would recoup at least 2 million of the 5.0 million jobs lost since 2000. U.S. GDP growth would be in the range of 3.5 to 4.0 percent a year instead of 2.5 to 3 percent expected as the economy resumes growth in 2010. Real wages would rise briskly.

At his confirmation hearing Treasury Secretary Geithner acknowledged China is manipulating its currency and promised to work toward a realignment of currency values; however, the Administration has backed off this position.

President Obama must get behind a policy to reverse the trade imbalance with China, or preside over the wholesale destruction of many more U.S. manufacturing jobs. These losses have little to do with free trade based on comparative advantage. Instead, they derive primarily from currency practices that make Chinese products artificially cheap in U.S. and other markets and Chinese restrictions on imports. These Chinese policies deprive Americans of jobs in industries where they are truly internationally competitive.

In the end, without assertive steps to fix trade with China, as well as fix the banks and curtail oil imports, the Bush years will seem like a walk through the park compared to job and real income losses Americans will suffer during the Obama years.

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