A few months of weak job gains would be less worrisome if other indicators’ strength made a rebound seem imminent. But that's just not the case. Between the lack of job gains, the Fed raising interest rates and record-high oil prices, it's not a pretty picture. Lee Price of the Economic Policy Institute spells out how the limping economy is going to mean trouble for whoever's in the White House after November 2.
Lee Price is research director at the Economic Policy Institute, a nonprofit, nonpartisan research institution based in Washington, D.C.
Our economy is sputtering once again. July, with its meager 32,000 job gain, was the fourth consecutive month of shrinking job gains.
It wasn’t supposed to turn out this way. Two months ago, when we learned that jobs had grown by more than 900,000 in March, April and May, it looked like the Great American Jobs Machine had finally kicked into gear. Persistent job losses had yielded more than three years of unprecedented stagnation in total private wage and salary income. Hopes were high that growth in job-related income had finally become the engine that could pull the economic train to higher ground.
We need faster job growth, to provide more people with income from work. Just to keep even with population growth, we need to add 140,000 to 150,000 jobs every month. To absorb new workers and to put the unemployed back in jobs, we ought to create at least 250,000 to 300,000 jobs each month.
Faster job growth would benefit those already with jobs. As slack in the job market has increased over the last several years, wage growth has slowed. A year ago, wages were rising at a 3-percent pace, but in the last year they’ve risen less than 2 percent. Meanwhile, inflation has gone the other way, picking up from about 2 percent to 3 percent. Consequently, inflation-adjusted hourly pay, which had been rising, has fallen about 1 percent in the past year.
A few months of weak job gains would be less worrisome if other indicators’ strength made a rebound seem imminent. Unfortunately, that is not the case today. In the last month, we have learned that:
- GDP growth slowed to a disappointing 3.0 percent pace in the second quarter from a healthy 4.5 percent pace the prior quarter.
- New home starts fell sharply.
- New orders for capital investment goods slumped for a second month.
- Oil prices have reached record highs.
The American public holds the president and majority in Congress responsible for the current state of the economy. That explains why, even after the latest jobs numbers were released, the president stuck to his stump speech claiming that “the economy is strong, and getting stronger.” Likewise, spokesmen for the administration and the congressional majority had been touting “the strongest economy in 20 years.” That was based on old GDP numbers, but revisions and a new quarter’s data have quelled such claims.
We need strong job and wage growth to become an engine for the economy because the two engines that have been propelling us—monetary and fiscal policy—have lost their oomph. Consumers could keep spending during the 3.5 year labor slump because of low interest rates and increased federal deficits. But now, we can expect interest rates to rise, while any boost the economy received from increased spending on weapons and tax cuts has already played itself out. The run-up in oil prices adds another brake on growth.
Mark Zandi of Economy.com has analyzed which government policies have done the most to lift GDP and jobs in the last 3.5 years. He finds that more than 60 percent of the effect has come from monetary policy. It’s hard to imagine how much weaker the economy would have been if the Federal Reserve had left interest rates at 6.5 percent instead of lowering them to 1.0 percent. The Fed’s cut in rates made possible the continued boom in housing, low cost auto loans and cash-out refinancing to use for on remodeling and other spending. While Zandi also found defense spending and middle class tax cuts had noticeable effects, he found very little boost from the tax cuts for the wealthy. Perhaps most important, Zandi found that a different policy—one based on quick and substantial relief to those most likely to spend (the unemployed, the strapped states and middle- and lower-income taxpayers)—would have generated more growth and 2 million more jobs.
All of this leaves us in a tough spot. We’ve almost exhausted the potential boost from both monetary and fiscal policy and still not triggered a strong, self-reinforcing growth spiral of jobs and wages. The Fed is now committed to raising rates in the coming year, but probably more gradually than was expected two months ago. We could undo some of the damage from the last three years’ tax and spending policies to generate more stimulus while committing to lower the longer term deficit, but that would require at least tacit acknowledgement by the Bush administration and Congress that their policy has failed. So what’s next? The economy will probably limp along through the November election, and whoever wins will have the daunting task of retooling policies to make it run again.
