The August survey of jobs was disappointing — 93,000 more jobs lost, lowering total employment to 129.8 million. Of course, we’d all like to see robust job growth all the time in all the surveys. But the weak job situation in the government establishment survey does not undercut the case that a strong, sustainable economic rebound is underway. It’s not so much that unemployment is a lagging indicator — the recession ended in November 2001 and was the shallowest on record. Jobs are being lost because job growth was so strong in the late 1990s. Unemployment was pushed down to 3.8 percent — an unsustainable employment bulge related to the Nasdaq 5000 and the super-strong U.S. dollar.
Japan had the same experience between 1992 and 1995 after its strong currency boom. The super-strong yen of the late 1980s caused a bulge in investment and jobs, which gave way to a decline in jobs in the early 1990s. Japan, however, kept strengthening the yen until 1995, creating a deep deflation spiral and even deeper job losses. But the U.S. broke away from the Japan analogy after 9/11/01 by adding extra liquidity, allowing the dollar to move to normal levels, and cutting tax rates. Unlike Japan, U.S. job growth will resume.
The current U.S. unemployment rate, 6.1 percent, is consistent with past periods of sustained fast growth in the U.S. economy. It is also adequate for further growth in consumer demand given the strong wage growth related to productivity growth and the strength of consumer balance sheets.
Robust job growth in the government’s establishment survey may have to wait a bit longer for a less risk-averse business community and a bigger head start for business investment. U.S. labor is burdened by a wide tax wedge (including Social Security, medicare, and health insurance). Furthermore, the differential cost between labor and capital has probably widened in recent years due to the improvement in the tax treatment of business investment and the increase in the employer portion of health-insurance costs, encouraging business equipment purchases rather than new hiring.
In addition to the recent unemployment news, there has been a lot of talk about the strong secular loss in manufacturing jobs. This should continue — but it’s not inconsistent with rapid overall U.S. job and income growth. Some of the strongest theories in economics concern “relative comparative advantage.” These argue that flexible economies that allow resources to shift to higher value-added portions of the economy will benefit from the shift.
On an absolute basis, the super-strong dollar of the late 1990s probably pushed some companies and sectors over a threshold, accelerating manufacturing job losses to China. But on a relative basis, the loss of manufacturing jobs has been a consistent trend for more than 50 years — this includes job losses to Japan, Korea, and Taiwan. Nonetheless, the U.S. remained the leader in job growth in the developed world in these years.
From a near-term perspective, weak job growth is consistent with other indicators of business caution — inventory depletion and relatively cautious business investment. But monthly data show that growth in demand strengthened throughout the second quarter and, so far, is continuing to strengthen into the third. In the three months ending in July, retail sales (excluding gasoline) rose at a 13 percent annual rate.
The advent of stronger demand and historically low inventories point to the need for significantly higher inventories than currently exist. This adds further support to the view that U.S. economic growth will snap back strongly in the second half of 2003 and throughout 2004 — averaging 4.3 percent over this six-quarter period.
In the process of rebuilding inventories and adding to business investment, labor market conditions should begin to improve considerably.