The 1.6 Percent GDP + 9.5 Percent Unemployment = Second Stimulus

On Friday, the Commerce Department revised its estimate for 2Q10 US gross domestic product (GDP). Unfortunately, the revision was a downward revision. According to the Commerce Department, the US economy grew at a 1.6 percent pace in the second quarter, less than the original 2.4 percent estimate. The number represents a sharp decline in the speed of economic recovery compared to the first quarter, when GDP grew at a more robust 3.7 percent clip. There's little question that the 1.6 percent figure is tepid, worrisome and certainly not sufficient reignite job growth.

If there is a bright spot in the Commerce Department report, it is that consumer spending, which represents the core of the economy accounting for nearly two-thirds of all economic activity, has risen at least modestly for four straight quarters. Still the pace of growth remains slower than normal in an economic recovery.

The US labor market remains abysmally soft. The unemployment rate in the United States was 9.5 percent and the broader U6 rate stood at 16.5 percent in July. The BLS August 2010 report will be released this Friday. I suspect the report will disappoint with the unemployment rate creeping up to 9.6 percent. My contention that our unemployment problem isn't just cyclical but structural got a boost from David Altig, research director at the Atlanta Fed. Writing in Macroblog, Altig takes us through the Beveridge Curve.

"The disconnect between the supply of and demand for workers that is reflected in statistics such as the unemployment rate, the hiring rate, and the layoff rate can be dynamically expressed by the Beveridge curve. Named after British economist William Beveridge, the curve is a graphical representation of the relationship between unemployment (from the BLS's household survey) and job vacancies, reflected here through the JOLTS (Job Openings and Labor Turnover Survey)."

The most tempting explanation for the seeming shift in the Beveridge curve relationship according to Altig is "is a problem with the mismatch between skills required in the jobs that are available and skills possessed by the pool of workers available to take those jobs." Another who thinks our unemployment problem has a structural component is Brad DeLong of the University of California at Berkeley who's been swayed by Altig's analysis. DeLong writes:

Given the large recent increase in vacancies in the past two quarters, the U.S. unemployment rate ought to have started to fall. It did not. That means that the chances are now very high that our cyclical unemployment is starting to turn into structural unemployment, as businesses that seek to hire and have the cash flow to hire still find that the currently-unemployed applying for jobs don't fit inside their comfort zones.

Taken together our tepid 1.9 percent 'recovery' plus our still torrid 9.5 percent unemployment rate call for decisive action. Perhaps it is a measure of the Administration's thinking but this weekend, Laura Tyson, a member of President Obama’s Economic Recovery Advisory Board, has an op-ed in the New York Times making the case for a second round of a fiscal stimulus.

The primary cause of the labor market crisis is a collapse in private demand — the same problem that bedeviled the economy in the 1930s. In the wake of the financial shocks at the end of 2008, spending by American households and businesses plummeted, and companies responded by curbing production and shedding workers. By late 2009, in response to unprecedented fiscal and monetary stimulus, household and business spending began to recover. But by the second quarter of this year, economic growth had slowed to 1.6 percent, according to a government estimate issued Friday. Clearly, the pace of recovery is far slower than what is needed to restore the millions of jobs that have been lost.

Households and businesses are on a saving spree to rebuild their balance sheets. Their spending relative to income has fallen more than at any time since the end of World War II. So there is now a substantial gap between the supply of goods and services the economy is capable of producing and the demand for them. This gap is starkly reflected by the 23 million Americans who are looking for full-time jobs and the millions more who have left the labor force because they could not find one.

The situation would be even worse without the $787 billion fiscal stimulus package passed in 2009. The conventional wisdom about the stimulus package is wrong: it has not failed. It is working as intended. Its spending increases and tax cuts have boosted demand and added about three million more jobs than the economy otherwise would have. Without it, the unemployment rate would be about 11.5 percent. Because about 36 percent of the money remains to be spent, more jobs will be created — about 500,000 by the end of the year.

But by next year, the stimulus will end, and the flip from fiscal support to fiscal contraction could shave one to two percentage points off the growth rate at a time when the unemployment rate is still well above 9 percent. Under these circumstances, the economic case for additional government spending and tax relief is compelling. Sadly, polls indicate that the political case is not.

The President needs to make the economic case directly to the American people and the politics be damned. Enough of this sitting in the White House and trying to be above the political fray. It's time to get down and dirty and rough up the GOP.


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