Here are the basic facts about today’s jobs report:
* The U.S. economy lost a net 345,000 jobs in May. This bad news beat expectations, so markets reacted positively.
* The unemployment rate jumped from 8.9% to 9.4%, the highest since August 1983.
Remember that employment is typically a lagging indicator, so the employment picture will still look bad even after the economy has begun to recover.
Much of the commentary focuses on the second derivative — things are getting bad, but the badness isn’t getting worse. Since commentary and news cycles rely on new information, it is easy to lose sight of the reality that our economy continues to shrink and lose jobs.
Keep your eye on the large financial institutions and the consumer. Financial institutions will continue to delever, but is it relatively smooth and steady, with larger capital cushions to protect against shocks? Or are there still more bad surprises buried in the balance sheets of large financial institutions, waiting to shock confidence again? If the stress tests and bigger capital cushions mean we have avoided further large institutional failures, that’s great news. Unfortunately, we can never know that for certain that such risk is gone.
Remember that consumption is about 70% of GDP, and consumers need jobs to have paychecks to spend. Watch the retail-sales reports and other indicators of consumer spending. Will the optimism in our markets translate into consumers spending more, or will the continuing job losses and consumer deleveraging combine to suppress consumption growth?
Notably absent from this calculus is the stimulus. Less than 5% of the $787 B is out the door, and the bulk of the cash flow will not happen until mid-2010. The administration would like to claim credit for the so-called green shoots of good news, and they deserve some praise for the stress tests, but they cannot plausibly claim that stimulus spending is helping the economy now in any significant way. No made up calculation of jobs saved can obscure that the money is not yet flowing into the economy.
I was surprised that no administration officials were on the business news channels this morning. That is highly unusual for Jobs Day. Maybe they are afraid of the following sequence of questions:
- Is the economy recovering? (They would like to answer this one, “Tentatively yes. We’re seeing positive signs, but there’s a long way to go.”)
- If so, is the economy recovering because of the stimulus? How can you claim that it is if only $40-ish billion has gone out the door so far?
- Or are the green shoots growing just because it’s springtime? Is the less worse economic news primarily a result of financial institutions raising capital and the passage of time?
In addition to being inefficient and wasteful, the stimulus was poorly timed. By deferring to congressional desires to shovel taxpayer funds to slow-spending infrastructure projects, the administration got a stimulus law that isn’t helping GDP growth now, and won’t have a quantitatively significant effect until 2010. The administration is in a tough spot — if the economy is not healing, then at some point the president will take the blame. If instead the economy is healing before the stimulus takes effect, then maybe the stimulus was unnecessary or even counterproductive.