U.S. Jobs, GDP, and the Eurozone
Friday, June 1, is a date that marks a shift in the public consciousness of the state of the US and global economy. What was touted for months over the past winter as a rebound taking hold in the US economy and the assertions that the US economy was ‘exceptional’ and would not suffer the slowdowns underway in Europe, China and the rest of the world - were all swept away on June 1 by the May US jobs report, a downward revised U.S. GDP numbers for the first quarter 2012, as well as by the rapidly deteriorating banking and general economic situation in the Eurozone.
Why Economists’ Jobs Forecasts Consistently Miss Their Mark
On the jobs front, Friday’s labor department data showed a growth of only 69,000 jobs, while the preceding month’s jobs numbers were revised downward for April from 115,000 to only 77,000. Both months were originally officially forecast by mainstream economists to show jobs growth of 150,000 and 180,000 respectively. A day earlier, the first quarter GDP numbers were also adjusted downward from 2.2% growth to only 1.9%, a decline that was totally unexpected by most economists, who had been forecasting that the current quarter, April-June, GDP would come in around the 2.5% to 3% range. But now will almost certainly end up in the 1.5% or even lower range, given a likely more rapid slowing in June.
One cannot miss jobs and GDP forecasts that badly without something being fundamentally wrong with forecast methodologies employed by most mainstream economists today, a point this writer has been making publicly repeatedly since last December.
The main excuse being offered today by economists for missing their recent jobs and GDP forecasts so badly is ‘the weather’. The exceptionally good weather this past winter, it is argued, moved normal spring production and jobs up by several months into the winter numbers. Another favorite excuse now appearing is that growing uncertainty about the coming ‘fiscal cliff’ (read: excessive deficits) after the upcoming November elections has resulted in an unanticipated slowing of business spending, and therefore of new investment and consequent job creation.
But the extremely poor jobs numbers for May and April have very little to do with the ‘weather this past winter’. Nor with business confidence impacted by anticipated deficits and debt levels after the November elections. It’s just bad forecasting, the result of cherry-picking the most recent jobs data to forecast long term, but without considering the broader economic picture and ‘broad turning points’ in the US and global economy.
In part, the winter months’ jobs numbers were grossly overestimated statistically for several reasons. As this writer has repeatedly noted in this and other publications, the jobs numbers during this past winter were suspect in the first place, largely boosted by questionable statistical adjustments based on methodologies that were more relevant pre-2007, but less so today. When this past winter’s jobs reports, averaging more than 200,000 a month are ‘smoothed’ out with April and May jobs results, what remains is a picture of continuing stagnant jobs growth since the economic relapse of last summer 2011.
To the extent jobs growth did occur over the winter, that growth was due to business spending, the nature of which was clearly unsustainable beyond a few months. Very short term, temporary factors were at work at the time that were clear for anyone willing to look: (1) excessive inventory build-up after the general inventory spending collapse of last summer; (2) business one time leveraging of end-of-year tax cuts; and (3) auto sales recovering from summer 2011 supply disruptions combined with deep year-end price discounting by the auto companies. None of which were long-term sustainable, as recent data are now beginning to show. And none of all this has anything to do with ‘business confidence’ falling due to growing concern about deficits and debt levels post-November elections.
Since August 2011, including the questionable brief jobs surge over the winter, the U.S. economy on average has been creating jobs at a pace of barely 125,000 a month, i.e. not even sufficient to absorb new entrants into the labor force. The reasons for the long term stagnation of job creation in the U.S. are simple. There is still no real recovery in new housing and construction spending in the U.S.; the Obama administration’s policies subsidizing manufacturing and exports since 2010 have produced a mere dribble of new jobs (even though many jobs created are at half pay); state and local governments continue to lay off tens of thousands every month; hundreds of thousands of workers continue to leave the labor force monthly; bank lending to small businesses never really recovered from 2009 lows and is declining once again; and real median household incomes have continued to decline in 2012, devastated in recent months a third time in as many years by rising gas, food, healthcare, education costs, and other prices.
Specifically, household consumption - the most important economic sector - continues today at best to stumble along, kept from contracting sharply only by rising credit card balances, historically cheap auto financing, rising household dis-saving, and, for the wealthiest 10%, by the ups and downs of the stock market (now in another sharp down phase until the Fed announces another ‘QE3’ program later this year). But there is no basic household income growth for the bottom 80%, nearly 100 million, households in the U.S. Median household income has fallen by more than 5% the past few years, continuing what is clearly a long term trend that began more than a decade ago in 2001, and thus far resulting in a decline of more than 10%.
Credit card, debt-driven, dis-saving-based consumption cannot be sustained. And without fundamental household income growth for the bottom 80%, combined with fundamental reduction of household debt loads, no sustained jobs recovery will occur.
The 1st Quarter GDP Statistical Revision
A similar critique applies to mainstream economists’ winter predictions that GDP would continue to rise in the second quarter higher than the first quarter’s initial 2.2% estimate.
As previously noted, GDP growth in the fourth quarter was largely inventory driven or a result of one-time year-end business spending designed to leverage business tax cuts. To the extent household spending occurred, it was debt and dis-saving driven. Both inventory spending and business spending thereafter declined in the first quarter, while government spending at all levels continued to decline significantly. Manufacturing and exports grew only modestly in the quarter.
But economists nonetheless predicted manufacturing and exports would accelerate in the second quarter, jobs growth over the winter would raise income and household consumption, and the ‘warm winter’ construction trend finally signified a turnaround of the housing sector and its recovery and contribution to growth in the spring. But none of this happened after February.
Almost all economists underestimated the impact of first quarter accelerating gas and fuel prices on consumers’ spending. The run-up in gas prices was largely the consequence of global speculators’ driving up the price of oil, combined with US refineries conveniently shutting down refinery plants simultaneously (which they typically do when there’s a surge in global crude oil prices), plus retail stations then holding prices at the pump up while crude and refinery prices fall. This coordinated supply chain development has occurred repeatedly since 2008. That year surging oil (and commodity) prices drove inflation to excess levels, despite a recession in the US already underway. It happened again in 2010, and again in 2011. The impact of rising gas prices on the US economy is generally underestimated by economists. The impact of the first quarter 2012 surge in gas prices on the current slowing of the US economy has been significant - and was generally unheeded by economists in their GDP growth projections earlier this year.
Nor were sanguine forecasts for the first quarter of accelerating jobs growth realized. Instead, jobs growth in April and May collapsed, as noted above - and with it, the projected income and consumption recovery. Home sales and home prices further disappointed, confirming no real recovery in construction. Finally, manufacturing and exports began to hit the wall of a global manufacturing slowdown, most serious in the Eurozone, but occurring in China, Brazil, India and elsewhere as well.
Already by June, bank research departments project a lower estimate for GDP growth for the second quarter, and even the third, July-September. But just as they underestimated the gas spike effect and the jobs collapse earlier, they are similarly underestimating the general impact of the Eurozone crisis and the global manufacturing slowdown now beginning to worsen rapidly.
The Eurozone Crisis and US Economic Contagion
The Obama administration’s first and second economic recovery programs, costing nearly $1.7 trillion in tax cuts and spending in 2009-2010, failed to produce a sustained economic recovery by 2011. The third recovery program, dribbling out piecemeal since September 2011 and culminating in the absurd ‘JOBS’ bill and HARP 2.0 housing plan, is now proving no more effective than the previous two programs in 2009 and 2010.
At the center of Obama’s third recovery program has been a focus on manufacturing-exports, run by General Electric’s CEO, Jeff Immelt. At the request of the big multinational corporations in 2010, Obama delivered more free trade agreements, more business deregulation, more pro-US business trade assistance, backed off from insisting they repatriate offshore profits and pay taxes, and introduced other manufacturing-centric US corporate assistance. This manufacturing-exports strategy was purportedly to generate the recovery that the 2009-10 first two programs did not. Manufacturing would ‘lead us out of the recession’, Obama and business announced. But it hasn’t - and it won’t.
Manufacturing now represents too small a total of the US economy at only 12% and employs only 11 million out of a US labor force of more than 150 million. The US dismantled and shipped its manufacturing base overseas over the past three decades. Multinational corporations admit that, in the last decade alone, they reduced employment in the US by 2.7 million jobs and hired 2.4 million offshore. Approximately 8 million jobs in manufacturing in the US have been lost just since 2000. Yet manufacturing, and the even smaller sector of manufactured exports, was supposed to generate the recovery in 2011-12 that still has not occurred.
Manufacturing did revive modestly since early 2011 but, as this writer predicted in late 2011, has now run headlong into a rapidly declining global manufacturing sector. The Eurozone’s manufacturing and exports have plummeted since late last year. Virtually all Eurozone economies’ manufacturing indicators (PMI) are also now declining. Moreover, China, Brazil and other key economies’ manufacturing and exports sectors are contracting as well. Manufacturing and exports are rapidly slowing across the world.
There is no therefore way US manufacturing and exports can continue to grow in a global economy where they are rapidly declining just about everywhere else. Meanwhile, housing and construction in the US is still bumping along a depression level bottom, with only apartment building showing any signs of growth. And state and local government spending continues to contract in most regions. Along with stagnant jobs growth, this is a scenario for slower growth in what remains of 2012, not a recovery.
Some mainstream liberal economists argue the Eurozone and China’s declining manufacturing and exports sectors will not negatively impact the US economy, since trade in goods is not that large a part of the US economy. But the flow of goods is not the key transmission mechanism for the contagion of the Eurozone’s accelerating recession impact on the US economy. The key transmission mechanism for the contagion is the banking system. Bank lending is already freezing up in Europe, as all the economies there (except Germany) have already crossed the threshold into what will prove a deep and protracted recession. Potential bank losses will likely spread from Spain and Greece to elsewhere in Europe, in particular Italy and France. Those losses and the lending freeze will spread to the US, where bank lending, already slowing to small and medium businesses again, will decline still further in the US, resulting in a slowing US economy in turn. Meanwhile, the US corporate bond markets are declining, junk bonds in particular. That will result in a further US slowdown in business spending and job creation.
As this writer concluded last October 2011 in the book, ‘Obama’s Economy: Recovery for the Few’, which predicted a steeply slowing global economy in 2012 driven by the Eurozone and a ‘hard landing’ in China, Brazil, and elsewhere, “The U.S., Eurozone and U.K. economies are tightly integrated, not just financially, but in a host of other economic ways. What happens on either side of the Atlantic soon produces a similar reaction on the other.”
In the months to come, the jobs markets in the US will continue at best to stagnate; apart from seasonality factors, the housing market will continue to ‘bump along the bottom’ as it has for four years now; government spending will continue to decline; and business spending, bank lending, manufacturing and exports will continue to slow, while consumers will continue to rely on credit and dis-saving to maintain consumption. GDP as a result will continue to lag.
And when US political elites gather immediately after the November elections, both political parties’ leaders will agree by December 31 to cut $2-$4 trillion more in spending in addition to the $2.2 trillion already scheduled to begin in January 2013. But they won’t call it austerity, which is the term for the deficit cutting in Europe from Greece to the U.K that is driving their economies into a deeper crisis. US capitalists and policy makers are more clever than their European counterparts. The US code words used for austerity will be ‘grand bargain’ and ‘fiscal cliff’.
Copyright June 2012
Jack is the author of the April 2012 published book, “Obama’s Economy: Recovery for the Few”, published by Pluto books and distributed by Palgrave-Macmillan. His blog is jackrasmus.com and website: www.kyklosproductions.com