Popular Economics Weekly

Nonfarm payroll employment increased by 216,000 in March, and the unemployment rate was little changed at 8.8 percent, the U.S. Bureau of Labor Statistics reported today. It is a start, but we have a long way to go to have a sustainable recovery. The economy is in recovery mode—both manufacturing and the service sectors are expanding, in other words—but with lots of slack demand and empty facilities yet to fill.

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Overall Gross Domestic Product is now back to producing what it did in 2007—that is, with 7.1 million fewer workers. Those unemployed mainly belong to the 80 percent of wage and salary earners who are actually earning less than before the Great Recession—if they even have jobs. The most difficult task will be to find decent jobs for the part timers and long term unemployed—those out of work for more than 6 months—if we are to bring back the sectors still lagging; real estate, construction and their corollary industries (insurance, building supplies, mortgages, etc). Real estate itself has shrunk to about 2 percent of GDP, when it averaged 7 percent over the last decades.

The last three months of job creation averaged about 160,000 payroll jobs per month. That is more than enough to keep up with the growth in the labor force, but it will only push the unemployment rate down slowly. Private payrolls were a little better at an average of 188,000 per month, as state and local governments continued to lay off workers.

In fact, economists say even if we are to maintain a 200,000 per month net job gain, it will still take until 2016 to get us back to anywhere near full employment. The decline in the unemployment rate from 8.9 to 8.8 percent was good news, though the participation rate was unchanged at 64.2 percent. This is the percentage of the working age population in the labor force, and is still below the 67 percent participation rate over the past 20 years.

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And so we still have to rely on manufacturing and booming exports for any growth at all. New orders, export orders and backlog orders slowed during March in an otherwise solid ISM manufacturing report. The composite headline index, which got a big lift from a slowing in supplier deliveries and from continued strength in production and employment, edged back only two tenths to a still very strong 61.2 that indicates month-to-month growth in overall activity at roughly the same level as February.

Government jobs fell 14,000, following a 46,000 drop in February.  For the latest month, state & local government declined 15,000 with 9,200 in local government education. The biggest negative in the employment report was for wages. The earnings picture in March is disappointing as average hourly earnings for all workers were flat, matching February. On a year-ago basis, wages were up only 1.7 percent, equaling the February pace, when earnings expand at 3 percent during good times.  Earnings clearly are lagging headline retail (CPI) inflation.

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But we are seeing very little overall inflation in overall Personal Consumption Expenditures, even with exploding oil and food prices, which have more to do with the Mideast worries and droughts than longer term demand factors. On a year-ago basis, PCE prices are up just 1.6 percent in February—up notably from 1.2 percent the month before.  Core inflation nudged up to a 0.9 percent year-on-year pace versus 0.8 percent in January, still below the Fed’s target range of 1.5 to 2 percent.

Why so little inflation? Because two-thirds of product costs are labor costs, and incomes are barely keeping up with living expenses, as we said. We will know when there is sufficient demand to push up overall prices, when consumers stop looking for bargains and are willing to pay for higher prices in other than the necessities. And that won’t happen until most of those 7.1 million have found work again.

Harlan Green © 2011