This is a tale of two cities. Well, two streets, Wall Street and Main Street, with a stop on Pennsylvania Avenue along the way. On Wall Street all is cheery, if you don’t count the investment banks that are faced with rising costs, lower incomes, and the need to pare staffs. Investors have watched shares soar: the Dow Jones Industrial Average, the S&P index of 500 stocks and the Nasdaq are all well up on the year – by 9.3 percent, 6.8 percent and 7.8 percent, respectively, even after the sell-off that followed today’s jobs report.
It is also a story of two tables, the conference table in the board room and the kitchen table in most American homes. In the next two weeks executives gathered around board room tables will be reporting more-than-satisfactory second-quarter earnings -- topping last year by around 14 percent, according to an analysis by Brown Brothers Harriman (retailers won’t do that well, companies selling in emerging markets will do better). The politically astute among them are keenly aware that corporate profits are outstripping the performance of the overall economy, and that the high profits they are earning abroad inflame voters who accuse them of exporting jobs and importing goods made by foreign workers in overseas plants. Still, happiness with high earnings trumps nervousness about the political reaction to them.
On Main Street, here is something that passes for good news: according to Epiq Systems, the number of Americans filing for bankruptcy dropped in June to 5,483 per day, from 5,846 in May, and now are running 10% below last year’s level. That, of course, could not offset the impact of Friday’s indescribably grim jobs report. Only 18,000 new jobs were created in June, the unemployment rate inched up from 9.1% in May to 9.2%, average hourly earnings ticked down, previous reports of job creation in April and May were revised downward, and 6.3 million workers have been out of work for six months or longer. Over 16% of the work force, some 25 million workers, are either out of work, involuntarily working only part time, or too discouraged to continue pounding the pavements of circulating resumés in the hunt for a job. About the only ray of sunshine is that the private sector created at least a few jobs – a measly 57,000 -- while the public sector work force shrank by 39,000.
The political consequences of this horrible report are difficult to divine. For the President, the rise in the unemployment rate is bad news, indeed. But Republicans will find it harder to argue that spending cuts now are just what the economy ordered. With monetary policy on hold, it is less clear than it was a short time ago that fiscal policy should tighten suddenly and by a lot.
Jobs are not the only topic being discussed around kitchen tables in America. Another is the higher cost of food and clothing, the latter due to rise further because retailers have pared inventories to keep discounting to a minimum during the back-to-school and Christmas shopping seasons. Gasoline prices are on the rise again after a brief drop, and now stand at some 30% above the level at the beginning of the year.
Still another kitchen-table topic is the housing market, and not only in the homes of laid-off construction workers. Most Americans tell pollsters that they still consider home ownership an important part of the American dream, and so are more than a little upset about the continuing high level of repossessions and the prospect of rising interest rates as government agencies begin to withdraw support for the mortgage market.
Drop in for a chat around two-out-of-three kitchen tables in America, and you will hear that the country is on the wrong track. Americans lucky enough to have jobs see neighbors who are less fortunate, and fear there is an unemployment queue in their future. They also have spent months watching a dysfunctional political system at work. Even if the President and the Republicans finally reach some sort of deal to cut the deficit and raise the debt ceiling when they gather for a see-how-hard-we-work photo op in the White House on Sunday, the political process that has dominated the negotiations is raising healthy cynicism to a level that is unhealthy for a democracy.
The good news is that the sluggishness of the recovery is due in good part to policies that can be reversed. America is not in terminal decline, but the victim of a president who wants to see the unemployment rate come down, but not at the expense of interrupting what he calls his “transformation” of the American economy, or of antagonizing the trade unions he needs to supply his re-election campaign with cash and doorbell ringers.
One reason there are few jobs for teenagers is a new regulation that prevents companies from taking on unpaid interns, positions that traditionally provide youngsters with their introduction to the need to be on time and having had sufficient sleep to work for a full day. Another is that the regulators have prevented drilling for oil and gas at the cost of what the oil industry estimates is 100,000 jobs – pleasing the environmental lobby, and carrying the Obama transformation of the energy sector another step towards the elimination of fossil fuels.
Lisa Jackson, administrator of the Environmental Protection Agency is signed on to the transformation agenda. Wind and sun are to replace fossil fuels and nuclear. Last week Jackson tightened restrictions on coal-fired power plants, while another agency is preventing the opening of a facility for the storage of nuclear waste. Jackson also plans to tighten regulation of all sorts of emissions in what the greener-than-green New York Times describes as “a flood of government mandates that will strike particularly hard at the manufacturing sector…”. Edward Whitfield, Republican congressman from Kentucky and a member of important energy committees, charges that the EPA is “just going full speed ahead with minimal attention … [to] job impact.”
The president wants to double fuel efficiency standards for automobiles, a move that would result in a $25,000 fine for every purchaser of a Mercedes automobile. Bill Visnic, an analyst for a car-research firm, told the Wall Street Journal, “To do something like this is essentially putting them out of business here.” Bad news for over 3,000 workers in Mercedes’ Tuscaloosa, Alabama plant.
Not to be outdone in the job-stifling race, the National Labor Relations Board is challenging Boeing’s right to open a new plant on the ground that the company is merely trying to transfer jobs from its unionized plant in the state of Washington to South Carolina, a “right-to-work state”. Executives with whom I spoke on a recent visit to New York tell me that this challenge to the right of a company to pick the most profitable place in which to locate a new plant is making them hesitate before investing in a new facility. The NLRB, composed of three Democrats and one Republican, is also considering a change in the rules governing union-recognition elections to make it more difficult for employers to get their arguments before their work forces. This is clearly Obama administration pay-back for union support.
Then there is Obamacare, which leaves small businesses wondering what their health care costs will be in the future. The optimism index of the National Federation of Independent Businesses has declined for three successive months, and 70% of small businessmen responding to a US Bancorp survey cite uncertainty as the reason they have no plans to expand their staffs in the next twelve months.
It is easy to blame the headwinds against which the economy is struggling on Japan’s stricken nuclear plants, or the weather. But the real, gale-force headwinds are coming from 1600 Pennsylvania Avenue.