Sunday Times (London)
September 5, 2010
by Irwin Stelzer
Not many people can define GDP (the value of a nation’s output). But everyone can define jobs. So the fact that the American economy is growing and GDP rising — inching up might be a better description — pales into insignificance compared with the fact that the job market remains in the doldrums.
It’s no use telling voters about positive revisions of earlier numbers, or the lay-off of temporary census workers, or that the private sector added 67,000 jobs in August, the eighth consecutive month of such growth.
That sort of information is of more interest to Wall Street, which cheered, than to Main Street, which focused on the fact that a total of 54,000 jobs disappeared last month, and that the unemployment rate rose to 9.6%, from 9.5% in July.
The good news, as President Barack Obama pointed out after the new data had been released, is that so far this year the private sector has added 763,000 jobs. All in all, this mixed report shows the job market remains dreary, but that the economy is not about to descend into the double dip predicted by the pessimists.
Although voters and therefore politicians are focused on jobs, economists are looking at some of the underlying conditions that will, in the long run, spur job growth.
One such is corporate profits, which are up almost 40% over last year, and after six straight quarters of growth are close to their pre-recession level. Some analysts believe that part of this increase is due to companies’ rush to book profits this year, rather than in 2011, when taxes are expected to be higher if Obama has his way.
As well he might: for a few months Congress will be loaded with defeated but still-seated Democrats with nothing more to lose by raising taxes. (New members are not sworn in until after the new year.) Another cheering sign is the strength of the manufacturing sector.
The data are ambiguous: in August manufacturing lost 27,000 jobs, but the Institute for Supply Management reported that its index of manufacturing activity rose from 55.5 to 56.3 — anything over 50 indicates that the sector is expanding. If seasonal factors are distorting the manufacturing jobs figure, the ISM index will prove to be the more accurate indicator of future trends.
Then, too, consumers are showing some signs of an increased willingness to spend — not wildly, but at a rate some 2% higher than last year. This might reflect the rise in consumer confidence in August: the Conference Board reports that its index rose from 51 to 53.5. Indeed, last month parents sent their kids back to school better clad and equipped than analysts had predicted. Back-to-school spending rose an estimated 3.3% in August. Rampant discounting will dilute the effect of the sales increase on profits, but retailers are in no mood to quibble with good news.
Consumers have also been restoring their recession-riddled balance sheets. At the start of the downturn the saving rate was 2.7%; it is now closer to 6%.
As consumers stabilise rather than increase their saving rate, spending should rise at a more rapid rate. If that happens — in economists’ terms, if final demand for goods and services picks up — manufacturing activity will accelerate, and with it job creation.
Credit markets also seem to be easing. The Federal Reserve Board’s survey of senior loan officers shows that lending standards are easing — still tight, but easing. It is difficult to tell whether small businesses are right in saying they are being denied credit by overly fastidious bankers, or the bankers are correct that they are having trouble finding small businesses willing to borrow. Never mind: the key to the activity level of small businesses, which create most of the new jobs, will be government policy.
The president wants to give some immediate tax relief to small business — before he raises their taxes at the end of the year by allowing the Bush tax cuts for high earners to expire. Owners of small businesses can be forgiven for being confused.
The agriculture sector is also adding some strength to the recovery. Exports of agricultural produce are at near-record levels, as rapid growth in the developing world, especially China, adds to demand and drives up commodity prices. Droughts in Russia, Kazakhstan and Ukraine have cut wheat supplies and diverted demand to American farmers, a development that is expected to remain a factor next year. That should contribute a bit to the recovery of demand for consumer goods.
Bill Horan, a corn farmer in Iowa, told The New York Times: “It means my wife can go out and buy a new sofa, and I can put new tyres on the pickup.” If reports that China is facing a severe corn shortage are correct, Horan might be able to indulge himself in a new truck, to applause from Detroit’s motor industry.
Then there is that political pariah, the financial sector. The banking industry rolled up profits of $21.6 billion in the second quarter, five times the $4.4 billion one year earlier. Wall Street is again paying large bonuses, which contributed to the 16% increase in first-half sales at Tiffany’s Fifth Avenue store.
Finally, there is the housing sector. Positive signs include a slight rise in prices, a surprising and unexplained increase in construction jobs in August, and record low mortgage interest rates. Negative signs include a continued high rate of repossessions, a large inventory of unsold homes, and the fact that the now-expired homebuyers’ tax credit probably shifted some buying into the early part of the year, portending a slowdown in the third and fourth quarters. My guess is that lower prices, with low mortgage rates and a gradual increase in incomes, will produce a turnround sooner rather than later.
Meanwhile, Americans are in the middle of a holiday weekend, marred for some by a hurricane lashing the east coast and for others by the fact that they will have to wait 58 days to tell incumbent politicians just what they think of them. Obama says there is “no silver bullet”; his critics wish he would add some certainty by holstering his over-used revolver.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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