Thursday, July 5, 2012

June Unemployment, Income and Economic Growth

Tomorrow morning the U.S. monthly unemployment numbers will be published. See U.S. hiring in June seen as slightly improved.

Somewhere around 100,000 to 125,000 new jobs are expected to have been created last month, hardly a cause for celebration. And if it's a lower than anticipated number, that's hardly a case for despair. We're very much in the muddle through stage of resolving our economic ills, and it looks like a quasi-permanent stage, since we need at least 300,000 new jobs each month to make a serious dent in the nation's unemployment situation.

Forecasts call for the official unemployment rate to hold at 8.2% or perhaps tick down to as low as 8%. Meanwhile, the more telling broader U-6 rate will likely remain well over 14%. But whichever number we choose, an 8% to 14% unemployment or underemployment rate isn't good for anyone, least of all those looking for permanent jobs.

While most recent reports concerning U.S. economic activity have been sluggish, there has been some relatively decent news as well. Aiding the outlook for consumer spending, energy and gasoline prices have declined rapidly and interest rates are at historic lows. Similarly, auto sales are holding up surprisingly well, and housing sales may be in the process of bottoming as well. At least we're not moving backwards.

That said, it's going to take a very long time to escape the deep debt and deficits hole we've dug and are continuing to dig. On top of that, European nations, along with much of the rest of the world, will continue to be a real drag on U.S. export growth for years to come.

As one pundit said when summing up our situation as the best of a bad lot, the U.S. is the cleanest dirty shirt in the drawer.

American incomes are barely growing describes why the U.S. is still struggling to find its footing:

"Those who say that uncertainty about the future is weakening the economy have it exactly backwards.

It’s the weak economy that’s feeding our uncertainty.

The American economy is losing momentum because it’s running out of fuel. Our economic fuel is income, and it’s in short supply.

Right now, real disposable incomes are growing at barely 1% a year, the slowest growth on record outside of a recession.

Without income, people can’t spend. If people don’t spend, businesses won’t expand. And if businesses won’t expand, incomes won’t grow.

For a while, back during the housing bubble, lots of people were able to pretend their incomes were higher by borrowing heavily against their homes and spending the proceeds. From 1998 to 2007, U.S. households withdrew an estimated $5 trillion from their home equity, amounting to an additional 5% of personal income over that period.

Then, after the bubble burst, the federal government stepped in to support incomes by cutting taxes and expanding the safety net, which boosted after-tax incomes by about $3 trillion over the past four years, or about 6% of incomes. That support was absolutely critical in preventing an even deeper depression, but now it’s disappearing.


Running as fast as we can

Absent a housing bubble or extraordinary government support, what do we have that can keep the economy humming? Not much.

The initial surge we got from increasing our exports has faded, now that the rest of the world is slowing down. Housing investment is recovering, but until the foreclosure crisis is resolved, housing can only contribute a modest amount to our gross domestic product.

No, our economy is tied to the fortunes of the consumer sector, for good or ill. Consumers are doing as much as they can.

Compensation received by workers — the wages, salaries and benefits that together account for about two-thirds of all income received — is rising because more people are working. But the average paycheck isn’t rising any faster than prices are.

 Lots of people are running as fast as they can just to stay in the same place.

Over the past year, total consumer spending has increased 1.9% after adjusting for price changes, quite a bit faster than the 1.1% growth in incomes. As heroic as consumers have been, there’s a point at which they just can’t do any more. Read “U.S. consumer spending falls in May.”

The numbers that we’ve been discussing are aggregates; they treat 310 million people as if they were all the same: consumers. But, of course, there are big differences within that label. Some are rich; some are comfortable; some are poor. Some are saving a healthy portion of their income; many more are simply living paycheck to paycheck. Some are losing their homes; some are just trying to pay down their debts a little; others could spend more without breaking the bank."

Summing Up

Whatever the reported employment numbers tomorrow, we have serious problems which will take a very long time to resolve.

And as long as growing government payrolls is improperly deemed to be a significant part of the solution, we'll keep growing our national debt in relation to the nation's wealth created by private sector activities.

Of course, we need more jobs, but we need the right kind of jobs --- jobs that contribute to our national wealth and economic well being. Digging a hole and then filling it up provides jobs but no wealth. Nothing new and of immediate trading value is created.

Drilling for oil and then selling it and distributing it through new pipelines would provide both jobs and wealth for our society. And much needed revenues for our government as well. We can trade newly produced oil (or coal or natural gas) for other goods and services.

In the end, we will need to "produce" more jobs in the private sector and fewer jobs in the public sector. We will need more genuine investment in the risk taking MOM oriented private sector and less "investment" by the government knows best OPM spending public sector bureaucrats.

Until we figure out which is the horse and which is the tail, we're headed for nowhere fast. And that's exactly the track we've been on for some considerable period of time now.

It's time for both a new playbook and for We the People to start calling the plays.

Thanks. Bob.

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