June Jobs Tell a Bad Story

Larry Kudlow
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Posted: Jul 02, 2009 3:31 PM
June Jobs Tell a Bad Story

After nine months of explosive monetary and fiscal stimulus, you’d think economic recovery would be upon us. But the June jobs report tells a much different story.

Non-farm payrolls fell by 467,000 as the unemployment rate edged up to 9.5 percent. This isn’t nearly as bad as the 700,000 monthly job losses of last winter, but it’s still a rough number. Equally disappointing is the household survey -- often a key turning-point signal since it captures the health of small businesses -- which has dropped 811,000 in the past two months.  

Donald Marron, a former senior economist with the Council of Economic Advisors and the CBO, calls it “a grim jobs report.” Marron, digging deep into the Labor Department Statistics, says the continued decline in hours worked by private-sector employees, now 7 percent over the past year, is especially troublesome. He writes, “The economy is thus losing jobs and, for the jobs that remain, is losing hours worked. That double-whammy is bad news for the economy.”

I would add that along with manufacturing and construction, the service sector continues to shed jobs, with a 244,000 drop in June. Inside that category, the important professional-and-business-services sector lost 118,000 jobs. The wage data is equally disconcerting. Over the past three months, average hourly earnings barely rose at 0.7 percent annually.

There are still some bright spots that strongly suggest the recession has bottomed. The ISM manufacturing report for June held a number of positives. Auto sales, retail sales, and home sales look to be bottoming. And May factory orders climbed as inventories crashed. So businesses, including automakers, may be increasing production in the months ahead.

In fact, even while second-quarter real GDP is expected to fall by 1 to 2 percent annually -- much better than the 6 percent declines of recent quarters -- the third quarter could show a small positive GDP score. Much smaller GDP subtraction from inventories, housing, and business cap-ex bodes statistically well for growth.

But there won’t be a real recovery until jobs start rising. The unemployment rate is a lagging indicator. But jobs are the most important coincident indicator of the economy. Until they turn around, nobody should expect anything resembling real economic growth.

Leading indicators -- especially monetary, financial, and credit-market signals -- are flashing “go” for future growth. The Fed has pumped roughly $1 trillion into the economy since last August. Key money-supply measures are growing at 10 to 15 percent annually. Short-term rates are near zero. The Treasury curve is steeply upward-sloping. Corporate-bond-market spreads have declined significantly. And commodity prices are off their lows. This is all good.

But for all the Fed’s stimulus, which has had a salutary effect on the banking crisis, the lags are long and variable. And as former Dallas Fed head Robert McTeer has written, much of the central bank’s balance-sheet expansion is being hoarded by commercial banks, with banks holding about $800 billion more than what they’re required to hold. Until these excess reserves come way down, the impact of the Fed’s monetary stimulus will be more muted than has traditionally been the case in Milton Freidman’s monetarist model.

And as Washington economist Bruce Bartlett has written, Obama’s $800 billion fiscal-stimulus package has yet to stimulate. Bartlett notes that 60 percent of the stimulus package goes to transfer payments and tax credits with no incentive effects. Meanwhile, the rest of the package, aimed at public works that might produce growth, is spending out at a snail’s pace.

As an old-fashioned supply-side guy who is out of date with contemporary Washington policies, I would add that Obama’s biggest mistake was not cutting marginal tax rates for individuals, businesses, and investors. Instead of the fiscal profligacy that is driving spending and borrowing sky-high, lower tax rates with true incentive-reward effects would have reignited the animal spirits that are sagging so badly.

But Obama’s temporary tax credits and social spending offer no growth effects. At the same time, the government’s fiscal nymphomania has scared everyone into thinking the U.S. is going bankrupt. The president himself has said there’s no money left. It’s scary enough to keep your savings under the mattress.

And if you add all the talk of nationalizing health care and energy (cap-and-trade) to the rest of Bailout Nation, it’s not hard to understand why people are shying from risk.

Stocks are the single-best barometer of our nation’s future economic health, and the stock market began to rise in early March. But over the past month, with all these new big-government tax-and-regulatory threats, the stock rally has stalled. And the June jobs report caused an immediate 2 percent sell-off for equities.

I do the best I can to be optimistic about our nation’s future. But realistically, the current picture is not particularly good.