Smith Faculty Opinion Article
June 4, 2009
Friday’s Jobs Report: Unemployment and Stock Prices Heading
Friday, the Labor Department will report employment data for May. In April,
the economy lost 539,000 jobs, and the consensus forecast is for another 550,000
jobs lost in May. My forecast is for a 561,000 loss.
Unemployment was 8.9 percent in April, and professional prognosticators
expect it to surge to 9.2 percent for May. My forecast indicates it will peak
between 10 and 10.5 percent the end of this year or in 2010. 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 April 2009, the economy lost 6.0 million jobs.
Construction and manufacturing shed 1.2 and 1.6 million 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 average annual rate in the
fourth quarter of 2008 and first quarter of 2009—that’s a big number for a two
Construction was up in March and April, and May data, due July 1, will
indicate whether a definite positive trend has been established.
Manufacturing remains lower than a snake’s belly, because GM and Chrysler are
in bankruptcy, and non-auto manufacturing is caught between flagging consumer
demand and exports from China subsidized by an artificially suppressed Chinese
yuan. Also, China has beefed up subsidies to export recession wrought
After a brief surge in January and February, retail sales and consumer
spending slumped in March and April, deflating hopes of some analysts for a
second quarter recovery in GDP growth.
Consumer spending and business investment should pickup in the second half,
and the recovery will begin in either the third or fourth quarter. The timing is
too uncertain to predict with any real confidence, though headline seeking
economists will tell you they have uncovered the divine narrative of future
The stimulus package should raise GDP by about 2.5 percentage points in 2010
and 2011 and add about 3 million jobs. Most of those jobs will be temporary, and
3 million jobs will not be enough to replace the more than 7 or 8 million that
will be lost before the recession ends.
A surge in business investment and a modest recovery in auto and new home
sales could add more jobs, but my electronic Ouija board won’t give up such
secrets of the Cosmos as of yet.
In all of this, the biggest uncertainties are first, how much the American
consumer will come back, after saving more during the first half and refinancing
mortgages to rebuild household balance sheets; and second, the length, scope and
consequences of the production shutdowns at General Motors and Chrysler
resulting from both seasonal factors and their Chapter 11 filings. President
Obama’s men promise an orderly retreat in Detroit but no one has any meaningful
historical experiences on which to base projections.
The uptick in May car sales demonstrate the consumer still has some appetite
for a bargain, but so far everyday retail purchases remain subdued. Also,
activity at new home showrooms and the surge in purchase contracts written by
realtors on existing homes show buyers are responding to the lower prices on
properties and lower interest rates.
Nevertheless 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 recovery will accomplish
only moderate GDP growth.
Simply, as the economy expands, businesses will struggle to find enough
capital, and the trade deficits on oil and consumer goods from Asia will
balloon. Those will create a shortage of demand for U.S. goods and services and
new layoffs once the stimulus spending ends.
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. Will
consumers and foreign investors be that silly again—President Obama’s policies,
if not his words, indicate his economic brain thrust is banking on just that.
Oil imports and consumer goods from China account for 90 percent of the trade
deficit. President Obama’s near term 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.
Increasing mileage requirements for cars and trucks will not have a meaningful
impact on the value of oil imports for several years.
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 Timothy Geithner will be
any more successful in prying open China than was Henry Paulson.
Stock prices will surge because companies have slashed payrolls and other
costs so much that even moderate growth will deliver significant profits, and
many U.S. companies are poised to exploit growth in Asia, through sales and
investments there. In the materials and energy sectors, U.S. firms will benefit
from the upward pressure on commodity prices stimulated by renewed Asian growth.
Simply stock prices fell twice, once on the recession and then on doubts
about the banks.
A surge in bank profitability was just about guaranteed by generous low cost
Fed lending at the short end of the yield curve, FDIC guarantees on bank bonds
and stress tests for banks that looked more like a social promotion than serious
Professors Summers and Bernanke, knowing that their jobs depend on the
progress of their students, graded the banks on a curve. Hence, the May surge in
stock prices reflected renewed confidence in the old saws “too big to fail,” and
“if the students need passing grades for the Professors to keep their job, then
by God the students will get passing grades.” For all but the most crippled
money center banks, cheap cash from the Fed and FDIC guaranteed bonds translate
into upward pressure on stock prices.
Since Memorial Day, stock prices have continued strong, because the broader
market smells recovery, and a good nose it has. The labor market may stink and
Chrysler and GM creditors paid dearly for the President’s political debts to
organized labor, but the American capital market—a.k.a. the NY Stock Exchange,
NASDAQ, et al.—is poised for summer surge in anticipation of the second half
In Friday’s jobs report the key variables to watch are:
Jobs Creation. May 8 the Labor Department reported the economy lost 539,000
payroll jobs in April, down from 699,000 in March. However, a significant part
of this improvement was a surge in temporary Census Bureau positions. The
private sector still lost more than 600,000 jobs. In recent weeks, new
unemployment claims have remained stubbornly above 600 thousand, and my forecast
is 561,000 jobs lost in April.
Even if the economic contraction slows in the second and third quarters, job
losses above 400,000 appear likely for the next several months. Job losses will
top 7 or 8 million before the hemorrhaging ends.
The economy continued to contract at a 5.7 percent annual pace in the first
quarter. The numbers would have been much worse but for a January surge in
Weak data for consumer spending and retail sales in February, March and
April, notwithstanding, some analysts expect consumer spending to rebound soon.
Through April, the retail sector continued to bleed jobs, but if consumer
spending is indeed strengthening, May retail jobs figures should show some
leveling and point to recovery.
Unemployment. In April, the unemployment rate, as computed by the Labor
Department, was 8.9 percent, and is expected to rise to at least 9.2 percent for
May. According to my forecast, unemployment will reach 9.9 percent by the end of
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 April, government employment rose
72,000, as overall payroll jobs contracted 539,000. This indicates the private
business economy shed 611,000 jobs.
Construction. In April construction lost 110,000 jobs. Since construction
employment peaked in September 2006, the sector has lost 1.4 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 the level of 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
Retailing. Retail trade has shed 766,000 jobs since November 2007, and lost
64,000 jobs in March and 47,000 jobs in April. 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 277,000 jobs, and 25,000 in April alone.
Manufacturing. Over the last 109 months manufacturing has lost 5.2 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
Peter Morici is a professor at the University
of Maryland School of Business and former Chief Economist at the U.S. International