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Weak Jobs Report Creates More Work for Fed

Irwin M. Stelzer

The party conventions—conferences in your terms—are over, the signs and funny hats have been binned, and reality has returned to centre stage in the form of last Friday’s jobs report.

It’s rare that a single data report matters much. After all, we can’t project a trend from a single point. The report that the economy added a mere 96,000 jobs in August is an exception. No matter that the unemployment rate fell to 8.1% from 8.3%: that is only because 368,000 more workers dropped out of the workforce, and the labour force participation rate dropped to its lowest level in 30 years.

Five million of the 12.5m unemployed workers have been job-hunting without success for more than 27 weeks. Most important, more than 23m, 14.7% of all workers, are either out of work, involuntarily on short hours, or too discouraged to continue the job hunt. For every worker who found a job, four gave up in despair, and dropped out of the workforce.

Here’s why this matters. First, it might prove to the majority of Americans that they are right to believe the country is on the wrong track, and that the president is wrong to claim that he is bringing manufacturing jobs back to America—in fact, some 15,000 such jobs were lost in August. Diana Furchtgott-Roth of the Manhattan Institute calculates that, given average growth in the labour force, the job creation rate recorded last month would take 32 years to bring the unemployment rate down to Obama’s promised 6%. Only if the economy adds 300,000 jobs every month would the unemployment rate drop to 6% by the end of the first year of his second term.

Unfortunately for Mitt Romney, this bad news is not necessarily good news for his campaign. He chose to resurrect the question Ronald Reagan put with devastating effect to the hapless Jimmy Carter some three decades ago: “Are you better off than you were four years ago?” To which the president responds: “You bet we are.” When Obama moved into the White House, the economy was losing 800,000 jobs a month. For the past two years it has been adding an average of 150,000 jobs. Not as many as Obama would like, but a move in the right direction. “The economy is starting to heal,” says Alan Krueger, chairman of the president’s council of economic advisers.

The second reason this report is so important is that it will enable the Federal Reserve Board’s monetary policy committee to do what chairman Ben Bernanke hinted in his Jackson Hole speech that he and several of his colleagues have been wanting to do: give the economy another boost, using “extraordinary methods” if necessary.

The chairman’s stated goal is a “sustained improvement in labour conditions.” Which is why he may have found worrying a study by the National Employment Law Project, a liberal (in the American sense) research and advocacy group. It claims to show the mid-wage, mid-skill jobs lost during the downturn are being replaced by low-wage, unskilled jobs. Jobs paying $14 to $21 an hour accounted for 60% of the jobs lost between early 2008 and early this year, but only 22% of total job growth.

Fed-watchers at Goldman Sachs now say there is better than a 50-50 chance that the Fed’s monetary policy committee will announce further measures to boost the economy when it meets later this week, perhaps including (my guess) an announcement that it will keep interest rates at current near-zero levels beyond the end-of-2014 date now agreed.

These low interest rates drive investors to seek higher returns on their money by buying riskier assets such as shares and commodities, driving up prices and the profits of traders. But what is good for investors is not necessarily good for consumers. Oil and food are among the commodities that rise in price when the Fed eases, increasing the pressure on consumers’ budgets.

Support for further easing is far from unanimous, even on the monetary policy committee. Those who feel the Fed has done enough argue that the economy is not in sufficiently bad shape to warrant QE3, another round of quantitative easing—in effect, printing money—or any extraordinary measures to give the economy a shot in the arm. Consumers have been paying down debt and are stepping up spending. Homebuilders are complaining that they can’t find enough skilled carpenters and plumbers, or workers with the skills required by the latest building technologies, to keep up with the demand for new houses. And August car sales rose by some 20%: the average car or truck on the road is now more than 11 years old, and the increased fuel efficiency of new vehicles makes it attractive to replace older ones now that petrol prices are again on the rise.

Moreover, fear of a recession has receded. The Organisation for Economic Co-operation and Development predicts that the American economy will grow at an annual rate of 2.3% this year. Since the first-half rate was 1.7%, the OECD is guessing that the economy will chalk up something like a 3% growth rate in the second half of the year.

Perhaps best of all, Bernanke might finally get his wish that the politicians bury the hatchet—not in each other’s backs—and cut a deal to avoid the year-end tax increases and spending cuts that would propel the economy over the fiscal cliff. The Bush tax cuts would be left in place and spending reductions postponed for six months to give the new Congress time to fashion a combination of spending cuts and tax increases that will bring the deficit under control.

Of course, wanting to do something to stimulate the economy and being able to do so are two different things. Interest rates are already in negative territory when inflation is taken into account, Bernanke can’t do much to end the uncertainty that has companies sitting on their cash piles, and he can’t do anything to reduce the “headwinds” to America’s recovery blowing over from Europe and China. But the odds are that he will use all the tools in his monetary kit to boost growth—and invent some new ones.

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