By any objective standard, Friday’s US jobs report was a poor one. Last month saw only 80,000 net new jobs, bringing the three month total to only 225,000. That is one third of the job creation rate of early 2012 and the weakest quarter in 2½ years. Once again, it confirms that the most noteworthy aspect of this economic recovery is how weak it is.
While the unemployment rate remained constant at 8.2 per cent, that is a misleading gauge of labour market health. Yes, this rate has fallen from the 10 per cent level of 2009. But, much of this improvement reflects shrinkage in the size of the labour force, rather than true employment gains. Broader measures of employment have not improved. The labour participation rate, which simply measures the percentage of working age adults with a job, just fell further to 63.8 per cent. That is a 27-year low.
These dismal job ratios reflect a fundamental lack of economic growth. Three full years have now passed since the trough of the recession. But, the US grew at only 1.9 per cent and an estimated 1.5 per cent for the first and second quarters of this year, respectively. For the full year, the consensus estimate is only 2 per cent. Such figures, well below the economy’s long run growth potential, are just not good enough to offset population growth and improve labour markets.
The obvious question is: why such a weak recovery? The answer traces back to the catastrophic 2008 credit market collapse. Namely, that the financial damage which it inflicted on consumers, lenders and homeowners has not been fully remedied. And, therefore, each of these three, broad sectors is struggling.
American households lost 20 per cent of their net worth during the collapse, as home values and financial assets plunged. So far, they have only recovered a bit more than half of this. As a result, they are financially cautious, for example saving nearly 4 per cent of their income, as compared to negligible, pre-crisis levels. This explains why consumer spending, which accounts for 70 per cent of GDP, remains relatively weak.
Then we all know the huge losses which so many lenders incurred in 2008 and 2009. It is no surprise that they, too, are hesitant. Total US commercial and industrial loans outstanding total $1.4tn, still well below 2007 levels. Lending criteria are tighter now, and marginal borrowers often cannot finance themselves.
Finally, millions of delinquent and underwater mortgages continue to depress the giant US housing market. New home construction is still running more than 50 per cent below its pre-crisis level. And, sales of existing homes, while slightly better, also have not seriously recovered.
The 2008 collapse and these resultant headwinds are not President Obama’s fault. They preceded him, and he has largely taken the right steps to counter them, i.e., fiscal stimulus, bank recapitalisations, and the like. And, the US economy is at least moving up, unlike Europe. Furthermore, he has consistently sought the right next step. Namely further stimulus now coupled with $3-4tn of long-term deficit reduction, beginning around 2014. But, the current economic weakness is the overarching election issue this year, and it portends a close outcome in November.