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Larry Kudlow: June Jobs Tell a Bad Story
After nine months of explosive monetary and fiscal stimulus, you’d think economic recovery would be upon us. But the June jobs report tells a much different story.
Nonfarm payrolls fell by 467,000, as the unemployment rate edged up to 9.5 percent. This isn’t nearly as bad as the 700,000 monthly job losses of last winter, but it’s still a rough number. Equally disappointing is the household survey — often a key turning-point signal since it captures the health of small businesses — which has dropped 811,000 in the past two months.
Donald Marron, a former senior economist with the Council of Economic Advisors and the Congressional Budget Office, calls it “a grim jobs report.” Marron, digging deep into the Labor Department statistics, says the continued decline in hours worked by private-sector employees, now 7 percent in the past year, is especially troublesome. He writes, “The economy is thus losing jobs and, for the jobs that remain, is losing hours worked. That double-whammy is bad news for the economy.”
I would add that along with manufacturing and construction, the service sector continues to shed jobs, with a 244,000 drop in June. Inside that category, the important professional and business-services sector lost 118,000 jobs. The wage data is equally disconcerting. In the past three months, average hourly earnings barely rose at 0.7 percent annually.
There are still some bright spots that strongly suggest the recession has bottomed. The ISM manufacturing report for June held a number of positives. Auto sales, retail sales and home sales look to be bottoming. And May factory orders climbed as inventories crashed. So businesses, including automakers, may be increasing production in the months ahead.
In fact, even while second-quarter real gross domestic product is expected to fall by 1 percent to 2 percent annually — much better than the 6 percent declines of recent quarters — the third quarter could show a small positive GDP score. Much smaller GDP subtraction from inventories, housing and business cap-ex bodes statistically well for growth.
But there won’t be a real recovery until jobs start rising. The unemployment rate is a lagging indicator. But jobs are the most important coincident indicator of the economy. Until they turn around, nobody should expect anything resembling real economic growth.
Leading indicators — especially monetary, financial and credit-market signals — are flashing “go” for future growth. The Federal Reserve has pumped about $1 trillion into the economy since last August. Key money-supply measures are growing at 10 percent to 15 percent annually.
Short-term rates are near zero. The Treasury curve is steeply upward-sloping. Corporate-bond-market spreads have declined significantly. And commodity prices are off their lows. This is all good.
But for all the Fed’s stimulus, which has had a salutary effect on the banking crisis, the lags are long and variable. And as former Dallas Fed head Robert McTeer has written, much of the central bank’s balance-sheet expansion is being hoarded by commercial banks, with banks holding about $800 billion more than what they’re required to hold. Until these excess reserves come way down, the impact of the Fed’s monetary stimulus will be more muted than has traditionally been the case in Milton Freidman’s monetarist model.
And as Washington economist Bruce Bartlett has written, President Obama’s $800 billion fiscal-stimulus package has yet to stimulate. Bartlett notes that 60 percent of the stimulus package goes to transfer payments and tax credits with no incentive effects. Meanwhile, the rest of the package, aimed at public works that might produce growth, is spending out at a snail’s pace.
As an old-fashioned supply-side guy who is out of date with contemporary Washington policies, I would add that Obama’s biggest mistake was not cutting marginal tax rates for individuals, businesses and investors. Instead of the fiscal profligacy that is driving spending and borrowing sky-high, lower tax rates with true incentive-reward effects would have reignited the animal spirits that are sagging so badly.
But Obama’s temporary tax credits and social spending offer no-growth effects. At the same time, the government’s fiscal nymphomania has scared everyone into thinking the United States is going bankrupt. The president himself has said there’s no money left. It’s scary enough to keep your savings under the mattress.
And if you add all the talk of nationalizing health care and energy (cap-and-trade) to the rest of Bailout Nation, it’s not hard to understand why people are shying from risk.
Stocks are the single-best barometer of our nation’s future economic health, and the stock market began to rise in early March. But in the past month, with all these new big-government tax-and-regulatory threats, the stock rally has stalled. And the June jobs report caused an immediate 2 percent sell-off for equities.
I do the best I can to be optimistic about our nation’s future. But realistically, the current picture is not particularly good.
— Larry Kudlow is the founder and CEO of Kudlow & Co. LLC, an economic research and consulting firm in New York City, and host of CNBC’s Kudlow & Company. Click here for more information, or click here to contact him.
Comments
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» on 07.03.09 @ 09:22 AM
Traitorous greedy Repubicans like Kudlow destroyed America. It will take time to rebuild it.
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» on 07.03.09 @ 12:33 PM
The present world-wide severe recession is the result of eight years of our following
the Bush-Greenspan-Phil Gramm total de-reg and deficit-financing model of financial planning.
Mr. Kudlow enthusiastically supported each of the catastrophic mis-steps along the
way. He blasted Congress for not de-regulating more and faster. He blasted federal
oversight agencies like the SEC and FDIC for being too tough on private sector financial and investment institutions. He supported Bush’s prosecution of two wars, even when the actual costs of waging them were kept off the visible part of the federal budget.
Now, amidst the ruins of the New York financial sector and the regulatory agencies
paid to oversee them, Kudlow is wandering into to a local watering hole to try the
“hair of the dog” treatment, and go right back to the ruinous policies which drove
us into this deep hole in the first place.
Perhaps as dual signs of faith in the system he espouses, Kudlow should drop his
employer-paid health program, and invest in one as a private individual. Then he
should transfer all his portfolio into financial instruments either un-insured by
the federal government - true “free market” capitalism - or should bunch them in
instruments which exceed the federal maximum account insurance plans.
Then take a couple of years off, and write us essays about how glorious private
health insurance is, and how safe and secure his investment and retirement accounts are. If he can.
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» on 07.04.09 @ 06:55 AM
Thank you Marcel and Publius. I think you are both right on the money. I find Larry to be someone that never admits he made a mistake. He never looks at the facts and changes his mind. Worst of all when he is hosting a show he always is very rude and interrupts with the same old broken record. How can he even look in the camera with a serious face? He continues to get his information wrong. He keeps talking about socialism when I pretty sure he does not even know the definition. If it were up to him there would be absolutely no government, no oversight and no regulations. I hope he never needs to collect social security,an eduction, to use medicare, call on police or the fire department.
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