Friday’s disappointing employment report out of the US is unsettling even for those of us that have consistently worried, and warned about the country’s weak job picture. It comes at a time when many people are understandably giving up hope of any major policy initiative out of Washington. And it confirms that this closely-watched release should be interpreted beyond its traditional role as a lagging indicator; these days, it is also a leading indicator for economic and political issues, both domestic and global.
It is not so long ago that a string of relatively strong reports – including monthly job gains averaging over 200,000 in the three months ended February this year – were fueling a bullish narrative about America’s prospects. After all, companies were sitting on lots of cash to finance new hiring and investment in plant and equipment; they were tapping into buoyant demand overseas, including in rapidly expanding emerging economies; and they had stretched their existing productive resources to the limit, thus setting the stage for a sustainable expansion.
This narrative got dismantled by successive monthly reports that did more than reduce average monthly gains to below 100,000. They also reinforced the fear that America’s labour market was risking structural impairment and, therefore, be much harder to fix.
Friday’s report adds to these concerns. Job gains were limited to just 80,000, again undershooting consensus expectation. The unemployment rate remained at 8.2 per cent, with a stunning 41.9 per cent of the 12.7m Americans out of work being long-term unemployed. The employment-population ratio stayed at the unusually low level of 58.6 per cent. And an alarming 23.7 per cent of teenagers in the labour force cannot find jobs.
The weak employment snapshot is consistent with other recent data releases, virtually all of which came in a lot worse than consensus expectations. It speaks to more than a subpar US recovery. It also illustrates the synchronized weakening of a global economy beset with limited policy effectiveness and adverse feedback loops – not just among individual countries, but also between economic fragility and political dysfunction and, especially in Europe, weak banks and deteriorating sovereign creditworthiness.
Economists who traditionally treat employment data as constituting lagging indicators – reflecting influences that have already played out in the economy – now need also to treat them as signals of future developments. And the consequences extend beyond America’s borders.
Worried about the reliability of their future income and given an already low household savings rate, consumers will spend less aggressively in the months ahead. Financial investors will also become more cautious. And companies will invest and hire less robustly.
A less buoyant American economy will amplify the pressures imposed on the global economy by Europe’s endless and still-expanding crisis. And do not look to policy makers in Europe and the US for effective offsets. Central banks are already in full experimentation mode, having stretched their traditional tools to the limit. The threat of a potentially disruptive fiscal cliff is looming ever larger. Policy responses are undermined by political bickering and dithering. And polarisation will only increase as the weak economy boosts those looking to unseat incumbents, especially in the run-up to the November elections in the US.
The notion that the world can rely on its pockets of healthy balance sheets to do the heavy lifting is theoretically correct but practically unlikely. Given the disappointing multilateral policy coordination, emerging economies will not fully compensate for prolonged weakness in Europe and the US. They too will slow, and are already slowing.
I hate to say it, especially as it sounds so fatalistic, but it is the unfortunate reality for now: Friday’s weak job report does more than confirm the prospects of a sub-2 percent growing US economy with unusually high and stubborn unemployment; it also signals even greater fragility ahead for both the country and the global economy.
This report will make households and companies less optimistic about their future, accentuate political dysfunction, and increase the cost of inadequate policy responses and poor global coordination. Until all this serves as enough of a wake-up call for short-sighted politicians in congress, it will make people like me worry even more about the wellbeing of both current and future generations.