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Moving Just Above Stall Speed on Growth Road

Irwin M. Stelzer

If the Federal Reserve Board’s monetary policy gurus hoped the new jobs report would give them solid guidance as to how to set future policy, they were sorely disappointed. The jobs situation neither deteriorated sufficiently to justify another round of easing, nor improved sufficiently to allow the monetary policy committee to back off its statement that it “will closely monitor incoming information … and will provide additional accommodation as needed”.

The information being monitored will not be restricted to the US: the Fed is keeping a wary eye on the deteriorating situation in Europe, and especially on Mario Draghi, president of the European Central Bank, who after promising to do “whatever it takes” to save the euro, last week reverted to eurospeak by announcing he will use the coming months to “design the appropriate modalities” for future policy. Not quite the same as doing “whatever it takes.”

The American economy did record 163,000 new jobs in July—172,000 in the private sector offset by 9,000 job cuts in the public sector. The unemployment rate ticked up from 8.2% in June to 8.3% (half that for those with a bachelor’s degree and higher), making it 42 months above 8%. Over 5m of the 12.8m unemployed have been out of work for more than 27 weeks, making it likely that their skills have deteriorated or become obsolete. Worse still, 23.5m workers are unable to find full-time work or are too discouraged to continue the job hunt. This is simply the worst three-year recovery in the post-war period.

Dig a little deeper and you find numbers that might affect the race for the White House. The unemployment rate for three important groups that President Barack Obama is counting on to turn out in large numbers is well above the national average. Over 10% of Hispanics, 14% of blacks, and almost 24% of teenagers are jobless. The latter are among the young people whose enthusiasm for Obama helped fuel his 2008 election victory.

They are not likely to be so enthusiastic this time. A study by William Emmons and Bryan Noeth of the Federal Reserve Bank of St Louis shows that the largest percentage wealth losses in the recession “were suffered by younger families”. And young people, some of them emerging from institutions of what is laughingly called higher learning, are finding jobs so scarce that many of them have had to move back in with their parents, who are not all delighted at this repopulating of what was an empty nest. Youngsters who in the not-too-distant past could choose among competing employers now find they outnumber available jobs. And it might get even tougher.

China, whose workers snatched millions of unskilled manufacturing jobs from Americans, is turning its attention to high-skilled work. The World Bank reports that China is producing 6m graduates every year, and by 2030 will add 200m graduates to the global labour force. One possibility, says The Wall Street Journal, “is that professional wages and employment in the US will come under increased competitive pressure.”

Like their British counterparts, American universities lust after the fees paid by foreign students, and have enrolled 723,000 of them in the past year—up 32% from a decade ago. All good for the world economy but a source of worry for American students famously less diligent than their Chinese rivals, due perhaps to insufficient “tiger mothers.”

Nor is any of this likely to improve soon. Stanford University professor Edward Lazear estimates that the rate of job creation is so slow that employment will not reach pre-recession levels until 2016. One “headwind”, to use the word now applied to any restraint on economic growth, is the situation faced by small businesses.

Studies by Lowell Ricketts and Juan Sanchez, also of the Federal Reserve Bank of St Louis, show that small firms did a better job of maintaining employment in the recession than did big companies. These enterprises are generally regarded as key to any acceleration in job creation, but are being hit especially hard by the provisions of Obamacare. If they grow to more than 50 employees, they will have to provide expensive healthcare insurance, or pay a fine. Several fast-food franchisees report that to avoid these ruinous costs, they have aborted plans to grow beyond 49 workers.

In a land of bad news, even moderately good news is a reason for rejoicing. The housing market continues its steady rebound. The S&P Case-Shiller home price index has risen for four consecutive months in 18 of the 20 cities covered by the index, and all 20 recorded increases in May, the last month for which data are available. Prices are now about where they were at this time last year—a big deal after continual reports of drops from the levels of a year ago—while inventories of unsold homes and vacant homes offered for rent are down.

Along with continued low mortgage rates, this improvement in prices and the inventory picture has driven shares in homebuilders up 50% this year—about five times the rise in the overall S&P index of 500 shares. But even in this sector there are reasons to worry. After a strong May, sales of newly built single-family homes plunged by 8.4% in June. Pending home sales—deals that are agreed but not completed—also fell.

There are other shards of good news. More and more homeowners are refinancing their mortgages, trading in higher-interest mortgages for lower-interest ones and saving $2,500 to $3,000 a year—cash that should in good part find its way into store tills. And late last week the Institute for Supply Management reported that the service sector grew in July for the 31st consecutive month, with new orders rising for 36 straight months. But non-manufacturing employment, which had been growing, contracted.

All in all, as Art Cashin, veteran of UBS Financial Services, told a television audience, we are “above stall speed but not by much … not enough to write home to mother about”—or to allow Fed chairman Ben Bernanke to plan a leisurely summer vacation.

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