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Recovery is One Thing, Jobs are Another

12:00 AM, Feb 5, 2011 • By IRWIN M. STELZER
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If Barack Obama were looking for a further boost in his popularity from the new jobs data, he'd be disappointed. Yes, the unemployment rate dropped from 9.4 percent in December to 9.0 percent last month, in part due to a decline in the labor force participation rate to the lowest level since March 1984, and in part due to a statistical glitch that the Labor Department says makes the December 2010 and January 2011 non-comparable. But a somewhat different and more closely watched survey shows that the economy added only a paltry 36,000 jobs in January, a gain of 50,000 in the private sector offset by a decline of 14,000 in the public sector. 

Recovery is One Thing, Jobs are Another

Some say the severe weather accounted for the loss of 32,000 construction jobs; others say that the hiring of snow-removal workers inflated the weak jobs figures. Some say the data don’t reflect the growth in self-employment. Some point to purchasing managers’ surveys that show that businesses are hiring. The phrase whistling in the graveyard leaps to mind. Or, better still, jobless recovery.

However you want to characterize these dismal data, unemployment remains “stubbornly above” the level that Federal Reserve Board chairman Ben Bernanke says he finds acceptable -- so he will continue to buy government bonds and print money to pay for them. The recovery is neither robust enough, nor creating enough jobs, to satisfy him.

But there is a recovery. Business spending on technology is rising rapidly, driving up the profits of companies such as IBM, EMC, Xerox and SAP. Indeed, the overall level of corporate profits was best described by one analyst in a single word: “surging.” Manufacturing activity is at its highest level since 2004. Most banks have eased the terms on which they will make business loans. Sales at a sample of large retailers rose 4.2 percent in January, exceeding the 3.3 percent growth rate last January, despite terrible weather. And sales of new vehicles rose by 17 percent in January from the preceding month.

So far, so good. Then we run into the economists’ ever-present “on the other hand.” The growth in retail sales was chalked up in good part because of heavy discounting, which means that profit growth will lag sales growth. And with costs rising for apparel and almost everything else retailers stock, profits will be squeezed further if consumers retain their now-ingrained habit of waiting for store-wide sales. 

Neither is the 17 percent jump in January auto sales all it seems. With the exception of 2009, this was the worst January sales level since 1993. The size of the monthly increase was due to miserable sales in December. With gasoline prices headed up, auto dealers are not expecting a boom year. And if a new regime in Egypt threatens closure of the Suez Canal, oil prices will almost certainly start to hit triple digits with some regularity, driving gasoline prices up further, and auto sales down.

Nor does one have to be a spoilsport to point out that the recovery is under threat from the continued inability of politicians to devise some combination of tax increases and spending cuts that will rein in the deficit, hovering around 10 percent of GDP. Indeed, Bernanke is warning that if the Republicans refuse to agree to an increase in the debt ceiling, due to be reached within the next few months, and the government cannot pay its bills, bond markets will be roiled and interest rates will soar. The state of play at the moment is that the Republicans will support an increase in the ceiling only if the Democrats agree to spending cuts, which the president says he will not do – and adds that his position is “non-negotiable”.

Add two other bits of gloom. Bernanke’s determination to continue printing money means that when QE2 comes to its scheduled end in a few months the Fed will hold some $1.6 trillion of Treasury securities, close to as large a pile of U.S. IOUs as China ($896 billion) and Japan ($877 billion) combined. Bernanke feels that the bond-buying, money-printing QE2 program has been effective in raising share prices, which in turn creates the wealth effect – consumers are and feel richer, and so are more willing to unzip their wallets and purses. So he is likely to extend it by at least several months.

That raises an interesting question for policy makers: would they prefer that we be indebted to China, or that the Fed continue to add to the money supply by persisting in its policy of quantitative easing (QE2)? Those are the choices unless the politicians agree on a deficit-reduction program.

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