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Job Growth Tapers Despite Summers’ Growth

Irwin M. Stelzer

It’s not that anyone here in Washington begrudges Britain, and to some extent Spain, their fledgling recoveries. But President Obama and other proponents of more government spending aren’t delighted that those nations’ austerity programs seem to be paying off in renewed growth rather than in the perpetual recession the Keynesian try-another-stimulus-crowd in the White House has been predicting. Conservatives are saying that the austerity sauce for the British roast beef would be just as tasty on the U.S. hot dog.

On Monday the House and Senate reconvene, with Syria dominating the agenda. But key components of economic policy will also have to be addressed this month: funding the government’s operations; defunding the unpopular Obamacare health care “reform”-or not; raising the debt ceiling-or not; approving another Obama stimulus program-or not. For good measure Obama will be sending his choice of Ben Bernanke’s successor as chairman of the Federal Reserve board to the Senate for confirmation. So in the next 30-60 days most congressmen might have to take time from fundraising, photo ops, and posturing before television cameras to earn their salaries.

These debates between the president’s team and conservative Republicans, between those who want to launch a new stimulus program and those who want to keep the deficit declining relative to GDP, will play out against a background that includes a strengthening economy; a job market that remains less-than-satisfactory; a Federal Reserve Board that is considering whether to reduce its purchases of bonds and mortgages, to “taper” in the jargon of the trade; and a battle over the selection of chairman Ben Bernanke successor. Consider those in turn.

The Economy: The U.S. economy continues to grow at a “modest to moderate pace” concludes the latest Fed survey of the economy. Most of the bank’s 12 districts report rises in consumer spending, with autos and housing-related goods leading the way. Auto sales in August were up by 17 percent, with Ford reporting its best sales month in seven years, and Chrysler and GM racking up record sales for several of their brands. Ford is doing so well that rumors—denied at the company—have surfaced that its highly regarded CEO, Alan Mulally might be looking for a new challenge just when Microsoft is looking for a new chief executive. And the auto industry is doing so well that supplies of new vehicles are tight, allowing it to cut back on special deals and discounts, and prompting auto makers to expand capacity, by about 7 percent in the case of Ford.

The housing sector continues to show strength, with sales and prices of homes and of the stuff with which to furnish them showing no sign of slowing significantly—I am ignoring short-term blips—in response to higher mortgage rates. Several retailers responding to my questions whenever I pop into their establishments around the country tell me that August was their best month ever, and experts in the field say that the outlook for Christmas sales is better than fair, with the exception of shops specializing in teen apparel. It seems that in the battle for dollars between parents who want new couches and carpets, and teens lusting after still another trendy jacket, the grown-ups are winning.

Add that the service sector grew in August at the fastest rate in almost eight years, and I am unworried about losing my bet with several colleagues—if the economy is not growing at an annual rate of 3 percent by year-end, I am to host a rather lavish dinner. My guess is that Societe General economists Aneta Markowska and Mary Beth Fisher have it right, “The U.S. economy will break above trend growth” beginning in the second half of the year. But it is less clear just how this growth will affect the labour market.

The Labor Market: The jobs situation is less healthy than the economy. On Friday the Labor Department reported that the economy added a disappointing 169,000 jobs in August—only 152,000 in the private secto—and revised its estimate of job growth in June and July downward by 74,000 jobs. The unemployment rate fell from 7.4 percent in July to 7.3 percent, the lowest rate in 4.5 years, but only because some 300,000 more people dropped out of the work force. Some of those were ageing baby-boomers who retired, but many were discouraged workers. The labor force participation rate is now at its lowest level since August 1978, and the total of those out of work but still in the hunt, and workers too discouraged to look for jobs or involuntarily working short hours exceeds 20 million, or 13.7 percent of the work force. The Lindsey Group estimates that if the labor force participation rate had remained at its pre-recession levels, the unemployment rate would be 11.2 percent rather than 7.3 percent, or 9.5 percent if we allow for age-related retirements from the work force.

The Taper: Some observers believe that the weak jobs report will prompt the Fed to postpone the “taper”—a reduction in its $85 billion per month bond-buying program—it has reportedly been planning to announce later this month. Others think the Fed will taper, but rein in its purchases by $10 billion rather than the $20 billion it had been considering. Bernanke is being pressured by Brazil, India, Indonesia, and other emerging countries not to taper. They fear such a move will drive up U.S. interest rates, causing investors to pull funds out of these countries and redirect them to the U.S., with dire consequences for global growth.

A New Fed Chairman: This is the most important economic policy decision President Obama will make during the remainder of his term. The difficulties in the job market might well tip the scales in favor of Larry Summers, along with Fed vice chair Janet Yellen the leading candidate. Yellen is believed to think that continuing easy money policies will solve many of the problems in the job market, while Summers is thought to favor a broader range of policies to drive up the labor force participation rate and drive down long-term unemployment. That is more in line with Obama’s thinking. Summers has strong support from past and present Obama officials, who argue that his intelligence makes him the person best suited to solve the inevitable crises to come. But his detractors are rallying to derail his appointment. These anti-Summers campaigners include feminist groups unhappy with his performance when president of Harvard, liberals who opposed his deregulation of the financial sector, and many who crossed swords with Summers over the years and were among the fools he did not suffer gladly.

Betting odds favor continued growth, no taper if the Fed looks beyond the headline 7.3 percent unemployment rate, a modest taper if it occurs underlying labor market trends, and Larry Summers.

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