Postpone the optimism

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Sep 5th 2008 | WASHINGTON, DC
From Economist.com

New payrolls figures show that American unemployment continues to climb


APNOT long ago economists and policymakers in America clung to hopes that the economy, after lurching through the depths of a financial crisis earlier this year, would rebound in the second six months. Such hopes look all the more forlorn now. On Friday September 5th a depressingly downbeat August employment report was released. The unemployment rate leapt to 6.1% from 5.7% in July. It now stands only just below the 6.3% peak that it reached in the last slump, in mid-2003.

The details provide a complicated picture. Non-farm jobs fell by 84,000 (or 0.05%), with losses concentrated in manufacturing (down 61,000), retail (down 20,000) and construction (down 8,000). Government, education and health services all gained jobs. Employment for prior months was revised down by a total of 58,000. When figures were published for the annualised rate of growth for the second quarter, showing surprisingly robust 3.3%, some dared to believe that a pronounced slump was averted. Now it looks more likely that such a slump was merely postponed.
If there is a silver lining to the payroll report it is that, despite eight straight months of declining payroll employment, the pace of contraction has yet to approach that which is typically seen in recessions. On average, since December, 76,000 jobs have been lost each month, equivalent to a monthly decline of 0.06%. From March 2001 to February 2002, the average decline was 169,000, or 0.13%. The better position today may be explained, in part, by the relative strength of exports, without which manufacturing would be shedding jobs at an even faster pace. No doubt the speed with which monetary and fiscal stimulus was brought to bear has also helped. Another factor may be that, during the economic expansion, employers were not quick to hire workers, which left little obvious fat for them to cut now.

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Oddly, unemployment has risen about as rapidly as it did in 2001-2002. In part, that is because the labour force continues to grow briskly, dumping new job-seekers on to the market. It may also be because of measurement. The Bureau of Labour Statistics computes non-farm payrolls each month from a sample of establishments that covers about a third of the workforce. It calculates the unemployment rate from a much smaller sample of households.
According to that household survey, employment plunged by 342,000 last month, a far worse picture than that shown by the payroll survey. But such monthly changes must be taken with a grain of salt. The household number diverges both because of a smaller sample size (which creates more volatility) and a differing definition of employment. For example, the payroll survey counts someone who holds two jobs twice; the household survey counts him once. The household survey counts the self-employed, the payroll survey does not. In the past 12 months household employment, recalculated to fit the payroll survey’s definition, is actually up by 320,000, while payroll employment is down by 403,000. So, despite the rise in the unemployment rate, the household survey actually paints a slightly more positive picture of underlying job growth.

Those nuances will not matter much to politicians who must now respond in the heat of a campaign. The weak economy probably plays to the advantage of congressional Democrats and the Democratic presidential candidate Barack Obama, who have been pressing for a second stimulus package focused more on government spending than on tax rebates. The latest news may weaken Republican opposition to such a package both in Congress and by John McCain.

The news, unhappily, also makes the job of the Federal Reserve a bit simpler. Its inflation worries in the past month have receded because of welcome news (the big drop in oil prices) and because of less welcome news, such as the higher unemployment figures. That makes it all the more likely that the Fed will not raise interest rates from the current 2% before the end of the year. The latest news may also mollify hawks on the policymaking Federal Open Market Committee who have been uncomfortable with interest rates being so low. Richard Fisher, the president of the Dallas Fed and a regular dissenter in favour of higher rates this year, sounded a bit gloomier about the economy in a speech on Thursday. “I think it is very likely we will suffer anaemic growth for the current and perhaps the next couple of quarters,” he told the Greater Houston Partnership. “Having sailed the economy along for years in a tranquil following sea, we are now navigating Force 10 conditions.”