On Friday, the Labor Department will release February employment figures. Since December 2007, the economy has shed 8.4 million jobs. A sharp uptick in employment would indicate the recession is ending, while more job losses would indicate a double-dip recession is more imminent. In recent weeks, new jobless claims have climbed, fueling pessimism among economists. The consensus forecast is for payrolls to decrease by about 50,000 and for unemployment to tick up to 9.8% from 9.7%. Factoring in part-time workers who would prefer full-time work and discouraged workers who have quit looking altogether, the unemployment rate is closer to 16.5%. The ADP private survey of employers for February, released Wednesday, indicated more job losses in February, but ADP forecasts have proven to be only a rough indicator of Labor Department reports. In the employment report, key sectors to watch for signs of economic recovery are manufacturing, construction and retail sales. Recent soundings by the Institute for Supply Management indicate manufacturing is picking up steam and more firms are adding employees than shedding them. In January manufacturers added 11,000, breaking a long losing streak, thanks to a 22,700 pickup in motor vehicles and parts production. Trailing auto sales and troubles at Toyota are expected to dampen gains or push manufacturing employment down going forward. Though industrial production has been rising overall, many gains are in durable goods industries that have learned to make many more goods with fewer workers. Preliminary retail sales are growing at a moderate pace -- perhaps 2% after inflation -- and in January that sector gained 42,100 jobs after losing 18,100 jobs in December. In February, East Coast blizzards likely put a dent in jobs growth that seasonal adjustments will not capture. Hence, an employment gain for February would be very good news, but a moderate decline will not necessarily indicate a great deal about future trends. The $789 billion stimulus package has not been reflected in construction activity and employment statistics. Construction, like manufacturing, has consistently shed jobs during the recession, and lost 75,000 in January.
Residential construction remains quite weak but that is only about one-fourth of the construction sector. If stimulus spending is to making things appreciably better, job losses in the nonresidential construction must moderate. Fourth-quarter GDP growth was 5.9% percent, but 66% of that was a slower pace in depletion in business inventories. Businesses continued to sell more goods off their shelves than they produced, but depletion of inventories fell from $157 billion in the third quarter to $20 billion in the fourth. The difference, $137 billion, counts as growth in the arcane world of GDP accounting. Of the 5.9% increase in GDP, consumption, investment, government and net exports contributed a paltry 2.0 percentage points to growth. That statistic is more indicative of the sustainable pace of GDP growth, and would indicate job losses will continue or gains will be too small to keep up with the natural growth of the labor force. Hence, unemployment will remain terribly high. As consumers are tied down by debt and declining housing prices, businesses won't invest because they lack customers. In addition, the perilous state of regional banks makes capital for most enterprises scarcer than hens' teeth. State and municipal balance sheets are too weak to appreciably push up government spending. Hence, improvements in the trade deficit, i.e., more exports and fewer imports, are essential to fire up the economy and create growth of 3% to 4%, which is necessary to significantly reduce unemployment. The president's export initiatives will help a bit, but China, the largest potential growth market, exports about $325 billion annually to the United States while purchasing only about $95 billion from American businesses. China maintains an undervalued currency that makes its goods artificially cheap -- inexpensive well beyond its labor cost advantage -- and imposes high tariffs and other barriers to U.S. exports. The imbalance in trade, and particularly the unlevel playing field with Chinese factories, is the most important factor keeping unemployment at 10%. Without a reduction in the trade deficit -- most importantly, progress redressing the imbalance with China -- it will be tough to get the economy growing rapidly enough to bring down unemployment.
The Obama administration and Congress appear oblivious to these most basic facts of GDP accounting, and most fundamental realities of macroeconomic policymaking.