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Still Missing the Last Piece: Jobs
By: Dr. Charles Lieberman
Date: 8/3/2009
The stage is set for recovery, although the most important actor remains missing. Ongoing job losses remain a significant threat. Without an end to the job losses, household income growth will not resume, impairing the ability of consumers, the linchpin of the economy, from increasing spending. It is widely expected that this week's employment report will reveal a more moderate, yet still sizeable, loss in jobs in July. That would qualify as another green shoot, but falls short of the budding flowers we require. For all the disagreement over last week's GDP report, we take it as signaling a significant rebound in manufacturing, including factory jobs, as the economy needs to arrest the massive inventory liquidation underway. So while economic conditions are improving, there is more work left to be done.
The latest GDP report evoked sharply conflicting opinions on the economy's performance. While it is now clear that the recession was far deeper than thought based on earlier GDP reports, the employment data and the freeze in the credit markets provided unambiguous messages that the economy was in distress. Therefore, I am not greatly moved by the change in the backward-looking perspective now evident. In truth, it adds little to the debate.
Parsing the data to extract its forward-looking implications is far more useful and rewarding, most especially the absolutely incredible rate of inventory liquidation. If final demand across the entire economy remains flat, then manufacturers must increase production by more than $144 billion (real dollars) just to stabilize inventories at current levels. (Final demand actually was about flat in Q2.) So, a sizeable impetus to growth will be forthcoming from this adjustment.
A second clear sector ripe for significant improvement is housing, which declined by $30 billion (at a 29.3% annual rate) in Q2, even as housing starts were about 2.5% higher than in Q1. Starts are counted when the first shovel goes into the ground, while the construction expenditures that enter GDP are spaced out over several months as the home is built. If starts continue to recover, as we expect, housing investment will become a meaningful contributor to growth by the fourth quarter. The benefits of the government's stimulus programs also still lie ahead. Putting this all together, expect estimates of Q3 GDP to be revised up across the board, but importantly, well into positive territory. But the recovery will really be underway only when employment turns up. Until then, the debate over the economy will continue to rage.
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