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.

Mark Zandi on Unemployment

Mark Zandi, chief economist of Moody's Analytics and co-founder of Economy.com, sits down for a conversation with attendees of the Monitor Breakfast about the state of the economy, including the recent plunge in U.S. housing sales and rise in unemployment. While he is optimistic about the economy's long-term chances to rebound, the national unemployment rate will likely continue to rise through the November 2010 elections. "If it's 10 percent come Election Day, I'm not sure I'd be surprised," says Zandi. "It's going to be in that kind of ballpark."

Weekly Jobless Claims Jump

The news today is as disappointing as it is grim.

New U.S. claims for unemployment benefits unexpectedly climbed to a nine-month high last week, yet another setback to the frail economic recovery.

Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 500,000 in the week ended August 14, the highest since mid-November, the Labor Department said on Thursday.

Analysts polled by Reuters had forecast claims slipping to 476,000 from the previously reported 484,000 the prior week, which was revised up to 488,000 in Thursday's report.

As of the end of July, the job gap stood at 11.6 million jobs—an increase of 300,000 from the 11.3 million job gap at the end of June. Private employers reported a net gain of 71,000 jobs for July — far below the 200,000 it takes for the unemployment rate just to hold steady and keep pace with the growing work force. The public sector, too, remains troubled. So far this year, state and local governments wrestling with budget shortfalls have shed 169,000 jobs. And further losses are on the way — about 20,000 to 30,000 more job cuts a month expected over the rest of the year, despite $26 billion in Federal aid that was recently allocated by the Congress.

Let's hope that next jobless claim to be filed is that of Timothy "Welcome to the Recovery" Geithner.

MyDD Weekend Reader

Some longer reads for your perusal this weekend.

Obesity on the Rise
Nearly 2.5 million more US residents were obese in 2009 than in 2007, according to a new report from the Centers for Disease Control and Prevention. (pdf) In total, 72.5 million Americans are obese, or 26.7 percent of the population.

Obesity rates exceeded the 30 percent mark in nine states — Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and West Virginia — compared to only three states in 2007. In 2000 no state had a rate of 30 percent or more. In 1991, no state exceeded 20 percent. Mississippi remains the state with the highest level of obesity, 34 percent. It's a dubious honor the Magnolia state has held since 2004. The correlation of obesity with the poorest states is striking, the poorest five all have high rates of obesity: Mississippi, West Virginia, Arkansas, Oklahoma and Alabama.

Obesity rates varied according to several factors, including age and ethnicity. People who were 50 years old or older had higher obesity rates than those under 30. The highest rate was found in “non-Hispanic black women” (41.9 percent). Overall, “non-Hispanic blacks” had a rate of 36.8 percent, and Hispanics had a rate of 30.7 percent. Rates also fluctuated across education levels. People with college educations were the least likely to be obese — the rate among men in this category was 22.9 percent, and for women it was 19.8 percent. Colorado and surprisingly the District of Columbia were the least obese, each had rates of under 20 percent.

The CDC cautions that the obesity problem is likely even larger than these numbers suggest because the report is based on self-reported data from a 2009 Behavioral Risk Factor Surveillance System Survey (BRFSS) of 400,000 people conducted by phone.

“Obesity continues to be a major public health problem,” CDC Director Thomas Frieden said in the press release. “We need intensive, comprehensive and ongoing efforts to address obesity. If we don’t more people will get sick and die from obesity-related conditions such as heart disease, stroke, type 2 diabetes and certain types of cancer, some of the leading causes of death.”

And obesity is a costly proposition. The CDC estimates that the cost of being fat tops $150 billion a year from obesity-related illnesses. On average, obese people have $1,500 more in annual medical expenses.

Tariq Aziz Interview in The Guardian
In an interview with the British newspaper The Guardian, Tariq Aziz, the long time aide to Saddam Hussein who served in various capacities now serving a 15 year prison sentence, implores the Obama Administration not to leave "Iraq to the wolves." Aziz, an Iraqi Christian, talks of the deal he struck with the invading American force in 2003 in which he traded his freedom for his family's safety. While he does not complain about his confinement, he uses the interview to plead for the US to remain involved in Iraq.

Americans, by and large, confined Iraq to the rear view mirror long ago. To a degree, however, Colin Powell's Pottery Barn dictum still applies: we broke it, we own it. The bitter reality is that the country remains a mess with a fractious political climate. As Aziz notes, "when you make a mistake you need to correct a mistake, not leave Iraq to its death." It's sad for Iraq is not just an expensive military failure but a moral failure.

Iraq is only seen as stable and tranquil when compared to the situation pre-the-2007 surge but that's hardly the appropriate standard for comparison. While security and services such as water, electricity, health care and education have improved, longer-term prospects remain uncertain and Iraq remains a shadow of its former self. In the end, Iraq is likely to either go one of three paths:

  • A complete partition into a Kurdish north, a Shiite south and a rump Sunni state around Baghdad either as a loose confederation or as independent states.

  • A strongman emerges to bend the country to his will. Perhaps the Dawa-led State of Law coalition of Nouri al Malaki will manage to consolidate its power bringing order through the establishment of hard-line Dawaist state that effectively replaces the former Sunni/Christian Arab nationalist Baathist state for a Shiite state aligned with Iran. Then again the possibility of a return by the Baathists cannot be discounted. 

  • The current political impasse continues. Despite the country's Election Commission confirming that Iyad Allawi, a Shiite former premier, was the March 7 election's narrow victor, Iraq's political parties are still arguing over which of them has the right to try to form a government. At the heart of this potentially damaging impasse is the rivalry between Allawi and incumbent Prime Minister Nuri al Maliki. Allawi's Iraqiya coalition narrowly beat the Shiite bloc formed from a merger between al Maliki's Shiite-led State of Law party and the Iran-friendly Iraqi National Alliance into second place in the election, but the prime minister is continuing to fight for a second term in charge.

Iraq remains as George Washington University Professor Mark Lynch describes it: "Iraq is a political house of cards. There are so many unresolved issues and the risk of this house of cards collapsing is really quite high."

Though we are again declaring Iraq to be a "mission accomplished," we will continue to have 50,000 troops there indefinitely amidst a situation that can be best described as controlled chaos. The likelihood that Iraq could again descend into an outright sectarian civil war cannot be discounted though in the near-term Iraq will probably limp from crisis to crisis.

Beyond the 50,000 troops ostensibly there to advise and assist their Iraqi counterparts, the US plans to maintain 5,000 diplomats and civilian advisers working with the Iraqi government and nonprofit groups. To protect our vice regal cadre of bureaucrats, the State Department plans on hiring as many 7,000 contract security personnel to provide protection as the U.S. military departs.

Nor is the money hole that is Iraq plugged. The State Department has put in a request for more than $800 million to start a police mentoring and training program with 350 advisers.

For those interested in reading more on the current political situation in Iraq, Joost Hitlermann's piece Iraq: The Impasse in the New York Review of Books is strongly recommended.

The Job Gap
The Hamilton Project of the Brookings Institution has a monthly series looking at the developing "job gap." This month, Michael Greenstone and Adam Looney have a post titled The Long Road Back to Full Employment: How the Great Recession Compares to Previous U.S. Recessions. After analyzing yesterday's tepid employment numbers, they find that the job gap stands at 11.6 million jobs—an increase of 300,000 from last month’s 11.3 million job gap.

The U.S. economy will need more robust growth to close this gap. If future job creation reaches about 208,000 jobs per month, the average monthly job creation for the best year for job creation in the 2000s, it will take almost 140 months (about 11.5 years) to reach pre-recession employment levels. In a more optimistic scenario with 321,000 jobs created per month, the average monthly job creation for the best year in the 1990s, it will take 59 months (almost 5 years).

July Jobs Report: Unemployment Unchanged, Anemic Job Growth

The Bureau of Labor Statistics reported its July Employment data.

Total nonfarm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent, the U.S. Bureau of Labor Statistics reported today. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment edged up by 71,000.

Both the number of unemployed persons, at 14.6 million, and the unemployment rate, at 9.5 percent, were unchanged in July.

Among the major worker groups, the unemployment rate for adult men (9.7 percent), adult women (7.9 percent), teenagers (26.1 percent), whites (8.6 percent), blacks (15.6 percent), and Hispanics (12.1 percent) showed little or no change in July. The jobless rate for Asians was 8.2 percent, not seasonally adjusted.

While the overall unemployment rate remained unchanged, private sector job growth was anemic and fell short of the consensus number of 90,000 jobs forecasted by economists. Furthermore, the 71,000 private sector jobs created fell far short of the 127,000 new jobs required monthly just to keep up with population growth. In short, the US economy is falling farther behind in its capacity to provide employment.

The BLS also dramatically revised its number for June down to a loss of 221,000 jobs. The agency originally reported that 125,000 jobs were lost in June. Private sector hiring in June, originally reported at 83,000, was revised downward to 31,000. The US economy has shed 7.7 million jobs since the recession started in December 2007.

 

There's more...

Diaries

Advertise Blogads