Friday’s weak US employment report confirms a disappointing historical pattern: after an encouraging start to the year, job creation has again hit a soft patch. To make things worse, there is a distinct possibility that, absent major policy initiatives on both sides of the Atlantic, the US economy may not accelerate as quickly as many hope – thus increasing America’s vulnerability to the deepening crisis in Europe.
The report again highlights the vulnerability of the employment situation. Net job creation in May amounted to only 69,000, well below consensus expectations of 150,000 and nowhere near the pace needed to address the large shortfall that persists more than three years after the global financial crisis. The unemployment rate inched up to 8.2 per cent, with the employed to adult population ratio at a worrisomely level of only 58.6 per cent.
The disappointing news is not limited to quantities. Composition of employment, duration of unemployment and stagnant earnings remain stubborn challenges.
Long-term joblessness rose to 42.8 per cent of those officially out of work. The average duration of unemployment is still more than twice the historical norm. And those fortunate enough to work are coping with flat earnings growth and declining hours worked.
We have been here before – twice in just the last two years. And on both occasions, the second quarter weakness was reversed later in the year.
Count me among those wishing for a repeat of the rebound, if not a much, much better outcome. Yet this hope comes wrapped in heightened worry. It will be much tougher going this time around given how economic, financial and political factors are converging in a worrisome manner.
Concerned by the never-ending crisis in Europe, a major export market for many companies, CEOs are cautious about hiring; and it does not help that emerging economies, the other source of meaningful external demand, are slowing sharply. Just look at Friday’s fall in China’s manufacturing indicator.
Sluggish job creation and earnings mean that heavily-indebted consumers will remain under pressure. And with the household savings already low, too many families are exhausting their emergency cash.
All this is consistent with the data released earlier in the week suggesting that the private sector is losing vitality – from the unexpected large fall in the ISM purchasing managers’ survey to higher weekly jobless claims and the downward revision in first quarter GDP. Then there is the prospect of a year-end fall in the government’s contribution to economic activity on account of both spending cuts and tax hikes – the so-called “fiscal cliff”.
With the November elections getting closer, it would be foolish to expect politicians to agree to the grand policy bargains needed to reinvigorate the US economy and to encourage companies to get their cash off the sidelines. However, we can hope that they will avoid making a bad situation worse. This requires they pursue two policy initiatives without further delay.
First, Congress needs to get going on measures to reduce the risk of the fiscal cliff. As stressed by Federal Reserve chairman Ben Bernanke and others, the economy is in no position to absorb such a large hit to aggregate demand. Moreover, the blunt nature of the expenditure and tax measures – not the result of coherent fiscal reform but, rather, due to the lack of responsible decision making – would aggravate a budget that is already structurally inefficient and unfair.
Second, the Obama administration needs to work closely with the Fed and congressional committees on contingency measures to counter collateral damage from Europe. Up to now, American officials have been keener on lecturing their European counterparts – with neutral, if not negative consequences – than specify what could be done to navigate the aftermath of potentially messy outcomes on the other side of the Atlantic.
There is only one thing worse than preparing for a crisis that does not happen; and that is not preparing for a crisis that does. It appears that American politicians not only lack plans to deal with adverse European contagion but are also on course to expose the country to additional self-inflicted challenges. Friday’s disheartening data are a timely reminder that these are enormous risks to take with what is already a very fragile employment situation.