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Blogcritics Business: Indicators Show Economic Recovery Fragile, Investors Fearful

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Is fear about the future of Eurozone eating into U.S. recovery? This certainly could be the case if the recent sentiment among investors away from the stock market and into the less profitable but more stable U.S. treasuries is any indicator. But parking money in safe assets like US treasuries starves the economy of investment, leading to slower economic growth and prolonged unemployment. One thing is certain: as long as the Eurozone problems remain a source of uncertainty, recovery will remain anemic.

The latest BLS employment report reveals that the U.S. economy created only 69,000 jobs in May, far below the 150,000 consensus expectation. The unemployment rate has increased slightly to 8.2%. While the Bureau of Economic Analysis released its first quarter 2012 GDP figure of 1.9 percent actual growth rate versus the projected 2.2 percent estimate. Earnings also remain below inflation. The numbers add up to serious weakness in the economy.

Weakness in the labor market with a silver lining in manufacturing

The number of long term unemployed (those who have been looking for work for more than 26 weeks) rose from 5.1 to 5.4 million and accounted for 42.8 percent of the total unemployed. The labor force participation rate has increased by .2 percent to 63.8 percent, but the increase offsets April’s decline — the bottom line is that the rate has not changed significantly.

The labor force participation rate is significant in that it mathematically changes the unemployment rate (the more people drop out of the labor force, or stop participating, the lower the unemployment rate will be) and affects how many jobs the economy needs to produce to return to a lower unemployment rate, such as that seen before the 2008 crisis. Atlanta Fed’s neat post shows that the higher the labor force participation rate is, the more jobs per month need to be created to return to 7.5 unemployment rate by 2013. If you use this nifty calculator, to reach 7.5 percent unemployment rate a year from now, the economy needs to produce 185,321 jobs a month. To reach a more realistic target of 8 percent unemployment a year from now, we need at least 124,316 jobs a month.

While the baby boom generation leaving the workforce is one factor responsible for the decline in labor force participation seen in recent years, especially worrisome is the decline in the labor force participation of those in the 16-24 age group. In the 1970s, nearly 70 percent of those in the 16-24 age range were working; today only about 55 percent are. In the 24-54 age group, labor force participation dropped to 75.2 percent, well below the historic low of 78.2 percent.

Standard wisdom suggests that the reason for the low labor force participation of young workers is that many of these workers are in college, but a recent study by the Economic Policy Institute concludes, “There is no evidence that young high school graduates have been able to “shelter in school” from the labor market effects of the Great Recession; college and university enrollment rates for both men and women have not meaningfully departed from their long-term trend since the start of the Great Recession.” Many young workers are simply staying home because there are either no jobs or the jobs that are available do not pay enough; both signs of a very weak job market, regardless of any other employment indicators.

The reason why this is particularly alarming in the case of those in the 16-24 age range is that the longer these young workers remain out of the job market, the less likely they are even to enter it. But where would a significant number of Americans who never entered the job market go, once they reached their 30s and 40s?

The number of those employed part time but seeking full time employment rose to 8.1 million. Those marginally attached increased in number to 2.4 million, up from 2.2 million in May of last year. The broadest measure of unemployment (U-6) has risen from 14.5 percent in Aril to 14.8 percent for May. If you look at the chart of U-6, notice that we’re, despite a downward trend, still so much higher than we were were at the height of the 1990s recession. 

Still, this measure may underestimate the true unemployment picture because the broadest measure does not include those who have dropped out of the labor force. The number of those not in the labor force has risen from 85,864 in May of last year to 87,968. Of those, the number who are willing and able to return to the labor force has risen from 6,821 in May of last year to 6,835. The bottom line is that there are millions who, in addition to those officially unemployed (around 12 million) wish to work.

Below is a chart showing the percent of those who are working part time because they can’t find full time work or because they had their hours cut back. Bottom line: jobs-wise, we’re more or less where we were at the height of the 1980s recession (compare the position of the red boxes). What’s interesting is that, given the U-6 rate and the information from the chart below, we’re not officially in a recession even if the job market certainly seems to be where it was during previous recessions.

The bright spot in the report is the trend in manufacturing, which saw gains on average of about 41,00 jobs in the first quarter of this year and 12,000 in May. Since January 2010, manufacturing employment generated nearly half a million jobs. Overall, the economy is struggling to produce jobs.

The two surveys

Some have noted the positive 422, 000 job growth in the BLS household survey. Some background is necessary here to appreciate what his may or may not mean.

The BLS measures the employment and unemployment picture in two very different ways. One is the establishment or the payroll survey (showing a gain of 69,000 for May), which measures employment based on payroll records of a sample of businesses across the county. The other method is the household survey, which measures employment ( at 8.2% in May) based on questions posed to a sample of households across the country. The chart below shows the difference between the two estimates. USPRIV is the payroll survey; LNS12035019 is the household survey. For May, the household estimate is higher, possibly reflecting more self-employment among American workers. 

Slow growth

The GDP has been revised downward to 1.9 percent. This is from the 2.20 percent projected growth rate of the economy. Below is the GDP chart comparing real and nominal GDP. Slow growth is bad news for unemployment because a slowly growing economy will not create wealth, which translates into fewer jobs being created.

Weak earnings and low wage jobs: dropping out can be a better option

Even if you do have a job, you’re not making enough, on average, to stay above inflation. Overall, average hourly wage earnings have failed to keep up with inflation, as the chart below shows.

Related to weak earnings is the issue of low wage jobs, or jobs that pay less than $10 an hour. Normally such jobs served as training ground for new workers, most of whom were teens, or as transitional employment. Consequently, there was substantial turnover in that sector. But recent trends are seeing stickiness in that low wage sector, suggesting that the low wage job is becoming a life-time job for many who lack the skills or the education to compete for better paying work. Since 1979, the share of workers working low wage jobs has risen from 22 percent to 28 percent by 2009, far beyond the fraction of workers working in low wage jobs in other advanced economies.

These are not jobs that will ever offer anything approaching a middle class lifestyle or even keep one above poverty. (someone earning $10 an hour working full time for a total of 2,000 hours a year will make less than the official poverty level of 22,891.)

Given these realities of low wage work and overall failure of wages on average to keep up with inflation, one can speculate why the labor force participation rate has been falling: those with little education and few skills, with little or no experience, are consigned to low wage work and poverty. One way out is to drop out altogether. 

Where are these people vanishing to? Many are going to school, but that’s not where the bulk of them are. With a nonexistent welfare safety net, many are opting for disability, as shown by the chart above constructed by Julie Hotchkiss of the Atlanta Fed. Perhaps the most interesting it the mysterious “Other” category.

Applications for disability have tripled in the last decade to 3 million a year, with the biggest increase seen in mental health disability claims because mental conditions are among the difficult to verify conditions that make it easier to qualify for benefits. One report suggests that 5 million workers have left the working world for disability since 2008.

The SSDI program provides 1,000 a month of income on average, which is about what a low wage job pays — and the best part is that you don’t have to do any work. This is a good option in a bad economy for those who lack stills or education or opportunity to get an education — they are assured a lifetime of free money. See this story about a 27 year old woman on mental health disability.

It all adds up to a very soft recovery and a troubled jobs picture.

Add to this the fact of the record low (-1.2%) spread on five year United States Treasury Inflation-Protected Security (TIPS) and you get the feeling that the top 1 percent is fearing an economy that’s likely to get even worse. Indeed, that we’re looking down the barrel of another crisis

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About A. Jurek

A. Jurek is one of the editors at Blogcritics. Contact me at: a.jurek@blogcritics.org
  • Glenn Contrarian

    Welcome to austerity economics.

    Mr. Jurek, my conclusion will directly address your article and will link my initial statement to your own conclusion.

    Conservative economists are right about something – taxation really is wealth redistribution. But does that money go down into a hole? Does it really? Think about it – except for tax dollars that are spent overseas (such as foreign aid, logistics for military operations, etc.), tax dollars are for the most part not wasted. I repeat, tax dollars are for the most part not wasted.

    Why is that? What are those tax dollars used for? Obviously, for big-ticket items such as Medicaid, Medicare, and Defense, but also for regulatory agencies and essential government functions. And here’s the key fact – when Medicaid, Medicare, Defense, regulatory agencies, and other government agencies buy things, where do they spend their taxpayer dollars? In America. Where do all those government employees buy their daily needs? In America.

    The American government is the biggest employer in the world. Corporations large and small compete for the government’s business…and many corporations have grown to be world leaders largely because of the American government. Boeing comes to mind.

    Yes, there is fraud – but compared to the sheer size of the government budget, such fraud is relatively minimal and will remain so as long as regulatory agencies are properly funded, properly supervised, and allowed to do their jobs. So fraud cannot be used as an excuse.

    So what happens when we shrink government too far, when we make government so small that we can drown it in a bathtub? American businesses lose their biggest customer. The gargantuan government agencies are no longer buying from American businesses, and those same agencies are forced to cut payroll whether by firing them or by cutting their pay and benefits, the poster child for which is Texas where 41% of all teachers have second jobs just to make ends meet.

    So since March 2010, while America has added two million private sector jobs (many of which are lower-paying service-sector jobs), America has also lost over a half million public sector jobs – almost all of which paid middle-class wages. That is why America’s recovery is so anemic and why it will continue to be so while we embrace austerity.

    Have we seen this before? Certainly. America had (through Keynesian economic measures) largely made it out of the Depression by 1936, but the Conservative Coalition essentially forced FDR to adopt austerity measures (as I pointed out with references in this article)…and down we went into the Depression. What pulled America out of the Great Depression? Massive government spending on a scale never seen before in human history – also called “World War II”, for in economic terms, that’s what WWII was: a full-blown government stimulus package. It’s not for nothing that during the early 80’s recession that people were joking that “we just need a good war”.

    Hoover slashed taxes to 25%, and we went into the Great Depression. Reagan slashed taxes to 25% for the wealthy, and we went into the early-80’s recession (and Paul Volcker convinced him to raise taxes quickly, which Reagan did and we recovered). Bush 43 slashed taxes, and what happened? The Great Recession. How many times do we have to repeat this lesson? Really high taxes are not good – but neither are really low taxes.

    And the proof lay not only in our own history, but in all the world around us. With the exception of certain OPEC nations, every first-world nation on the planet has something in common: they’re all socialized democracies, all what most conservatives would call “nanny states”. There’s plenty of other nations that have governments small enough to drown in that proverbial bathtub (as Grover Norquist wants) – and they’re ALL third-world nations. Every. Single. One.

    So back to employment. What happens when the government sheds so many jobs? Not only do we have over a half million fewer middle-class jobs, the former employees themselves are generally forced to find low-paying service-sector jobs, or simply stop looking for a job altogether and become a burden on the taxpayer, and voila! Welcome to the unemployment statistics of our anemic (austerity-based) economic recovery.

    Taxes are wealth redistribution – conservatives are right about that. But what they miss is that such wealth redistribution is essential to American business! That wealth redistribution pays not just for teachers and firefighters and police, but for all those other government functionaries who live in America, pay American taxes, and buy goods from companies here in America…and they ensure that their agencies and departments purchase goods from American companies, too!

    Again, taxes that are too high are a bad thing – but taxes that are too low are at least as bad. Why? While Big Business may get an initial shot in the arm by not having to pay higher taxes, their bottom line will still hurt because many of their customers no longer have middle-class wage-paying government jobs.

    In a first-world democracy, government and business have a symbiotic relationship – hurt one, and the other will suffer as well. The failure of Greece was not the size of their government, but their system that allowed people to retire on a government pension at age 55. But for every Greece that shows the failure of a “nanny state”, one can easily see in the third world a dozen examples of the problem that lay with having small, weak governments.

    The wealth redistribution that we call taxes is a GOOD thing, and essential to America’s economy. Slash the taxes, and we slash the economy – we are cutting our own economic throats.

  • Igor

    Most of the great wealth created in the USA was sponsored by the US taxpayer. Every business in the USA can trace it’s wealth and success to government financed and managed projects. Even the oh-so-chic Facebook, Google, etc., had their roots in government projects and were facilitated by pioneering work in government labs and agencies.

    In addition to ALL the high-tech businesses that were sponsored by the US taxpayer and created by US government agencies, the very means of doing daily business were created by the government: the roads, the railroads, the international shipping ports, the USA Navy that protects ALL shipping around the world.

    All of those things were done by the US government. So it is ignorant ingratitude and disloyal treachery for US business to now claim that government is an enemy, and to posture as “self-made”.

    There is not a business in America that does not trace it’s success and it’s very existence back to the willingness of American citizens to tax themselves to provide a growth environment to American business.

    It is base treachery for American business to now turn on the US citizenry and proclaim it’s unwillingness to contribute to American society.

    Our very history demonstrates the foolishness of the “trickle down” theory: once the guys at the top get their hands on money and power nothing can dislodge some of that money and power and let it trickle down to the peasantry.

  • Les Slater

    Retiring at 55 is the reason for Greek economic problems? Efficient use of a person’s labor for 30 years is more than enough to provide all the wealth needed to sustain any population size including investments to dramatically increase the quality of life, including all cultural aspects.

  • Glenn Contrarian

    Les –

    I said the reason why Greece is failing is because of the system that allowed people to retire with pension at 55. Implied are the words “that – among other things – allowed”. More importantly, the Greek system of tax revenue collection is notoriously corrupt, and that said corruption is so entrenched within the tax collection system that it is effectively preventing Athens from being able the changes required to get its economy back on track.

  • Les Slater

    Glen –

    I did read what you said and I reread it after your response. Fundamentally, what is a pension other than living off what is produced by those still producing? There is no reason in the world that should be a problem unless the mechanism for distribution of the products of labor is extremely inefficient. The question of taxes is a smokescreen, superficial.

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    It seems particularly perverse that it is the capitalists who tend to oppose lowering the retirement age, yet these same capitalists who refuse to hire over-55s because they are a poor investment.

    I have to wonder, though, Les, whether 30 years of individual labour – even efficiently used – is indeed enough to sustain a robust economy what with the increasing average human lifespan and the high healthcare costs that entails.

  • Les Slater

    Dread –

    In the drive to increase profits, or more properly, to increase the rate of return on investment, the employers are driving down what percentage of what’s produced going to the producer. The immediate reason for this is competitiveness on the world or regional basis. The problem is that when a large percentage of the consumers are also the producers then a surplus develops. In Marxian terms it’s called overproduction. Overproduction only in a capitalist sense, goods cannot be produced profitably. Productive investment drys up and there’s no place to invest except speculative instruments of capital.

    A huge portion of what useful that is being produced is being used to support nothing but the maintenance of the unproductive propping of capital.

  • Les Slater

    Dread –

    High healthcare costs? For the capitalist system it seems it is more profitable to have an unhealthy population. The food industry feeds into this helping to produce a base population that the healthcare industry can make profits on.

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    Les: I think in your scenario this is where advertising comes in: the technique of persuading people to buy products they don’t need.

    An unhealthy population may be good for the healthcare industry but it has a big impact on the profits of all employers because of employee work days lost to illness. There’s something missing in your narrative here.

  • Igor

    @3-Les
    @4-Glenn

    The cure for early retirement is the same as the cure for unemployment: reduce the work week.

    Industrial efficiency increases about 2% a year. Relentlessly. That’s what a good capitalist system does (take it from a life-long capitalist!): it replaces people work with machine work. Thus, a recurrent expense is replaced with a one-time expense.

    Consequently (it follows with inexorable logic!) you MUST reduce work time OR increase consumption. We were unwilling to reduce worktime, so we increased consumption after WW2. But now we’ve run the string out, as evidenced by runaway obesity!

    Save the economy! Cut the workweek to 32 hours!

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    It is true (or at least common sense) that workers who are less tired are more productive. IIRC there are many studies that back this up.

    The thing is that if your workforce works fewer hours individually then you need to hire more workers to cover the lost hours. This isn’t necessarily a case of expense but of hassle. If labour laws could be amended so as to reduce the amount of red tape needed to get someone hired (in my case – albeit in law enforcement – 5 months and counting!), then you might find more employers willing to reduce their work week.

  • Les Slater

    My solution is to the workers in charge… of everything.

  • Igor

    Anthropologists say that early man had about a 3 hour workday. Let’s see, that’s about 20 hours per week.

    And efficiency studies say efficiency drops off after about 20-25 hours.