After last week’s horrible unemployment numbers from Europe, some may be tempted to downplay the monthly US jobs report coming out this Friday. That would be a big mistake. The data will help shed light on four issues that are central to the wellbeing of both America and the global economy.
First, some context. Almost five years after the global financial crisis began, western economies as a group still struggle to overcome a “new normal” of unusually sluggish growth and persistently high unemployment. The longer this persists, the greater the risk that – rather than serving as a transition to revamped growth and job creation models – the new normal will morph into one or more lost decades with terrible human costs.
Last week’s data from Europe highlight the depth and breadth of the challenges. In countries such as Spain, already alarming unemployment continues to set distressing records. And the previously unthinkable overall rate of 27.2 per cent conceals even greater pain, including 57.2 per cent joblessness among the young.
The data also confirm that the economic malaise has spread to the stronger part of Europe. Countries such as Germany are slowing and unemployment is edging higher. It remains to be seen whether this will enhance or undermine their willingness to financially support weaker eurozone members, let alone alter the macroeconomic policy mix away from austerity.
Against this background, the US looks quite good. Since 2010, the unemployment rate has declined consistently to 7.6 per cent (albeit accompanied by a decline in the participation rate to a level last seen in 1997). Meanwhile, Friday’s first-quarter growth rate came in at 2.5 per cent annualised, as balance sheets in many segments of the economy continue to heal.
This simple yet stark comparison may tempt some to be complacent about the American jobs report. It should not.
A meaningful part of the improvement in the US economy has been “assisted” by exceptional factors. Friday’s data will help assess the probability and possible timing of the critical transition from assisted to genuine improvement, particularly in the following four areas.
Yes, private components of gross domestic product, including a 3.2 per cent growth in personal consumption in the most recent quarter, are doing well. But they have been accompanied by a decline in the household savings rate to 2.6 per cent, a level last seen in 2007. This is below many estimates of the longer-term equilibrium rate. It also conceals the many vulnerable households pushed to extremely precarious positions.
Yes, last week’s congressional U-turn on disruption to air travel linked to the sequestration suggests that Washington is not too polarised to come to its senses quickly. But there is little to suggest that this will prove material for correcting a destructive mix of short-term fiscal contraction and persistent uncertainty about medium-term budgetary reforms.
Yes, by adopting unconventional measures the Federal Reserve has played an important role in partially offsetting the effects of political dysfunction and irresponsible risk-taking by segments of the private sector in the run-up to the global financial crisis. But the longer it remains in this highly experimental policy terrain, the greater the risk of additional collateral damage and unintended consequences.
And, yes, the equity market has done very well, raising hope for higher consumption and investment on account of a stronger “wealth effect” and energised “animal spirits”. Yet excitement among investors is accompanied by considerable levels of anxiety, given the extent to which Fed policy has disconnected asset prices from underlying fundamentals.
Robust employment growth would – and, let us hope, will – play a critical role in helping the US pivot to a better place in all of four of these areas. It would do this by maintaining consumption and allowing for a more sustainable savings rate; by countering an excessive upfront fall in public spending that increases the risk of a recession; by enabling the Fed to slowly and gradually normalise monetary policy before it breaks too many things; and by reducing the risk of financial bubbles.
At a time when Europe continues to struggle, and growth in emerging economies has tapered, many now see a more robust American recovery as the key to maintaining the momentum of the global economy. They are right. And Friday’s jobs report will help shed light on a crucial requirement in this regard: the progress the US is making in shifting from assisted to genuine growth.
The writer is the chief executive and co-chief investment officer of Pimco