Jobs, Growth Slowdown and the Stimulus
Carlos M. Pelaez
The objective of this post is to analyze the need for a shift in government policy in the US. The stimulus strategy is analyzed in (I) in terms of general strategy, monetary policy (IA) and fiscal policy (IB). The report on the employment situation with 27 million people in continuing job stress is discussed in (II). There is a comparison of growth and job creation in four US recessions in (III). Financial turbulence is discussed in (IV), economic indicators in (V) and interest rates in (VI). The conclusion is in (VII). If you have difficulty in viewing the tables and illustrations go to: http://cmpassocregulationblog.blogspot.com/
I Stimulus Strategy. The monetary and fiscal stimulus of the US government has extended over two administrations, the Federal Reserve and Treasury. There are two different aspects of government policy working in opposite directions of growth and jobs: the objective and size of the stimulus and parallel restructuring/regulatory shocks. First, the objective of the combined stimulus is to turn around the economy, creating the conditions for the private sector to grow and create jobs. The calculation of the government stimulus by Mark Pittman and Bob Ivry at Bloomberg declined from $12.8 trillion committed and $4.2 trillion used by March 2009 to $11.6 trillion committed and $3.0 trillion used by September 2009 (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahys015DzWXc# see Pelaez and Pelaez, Regulation of Banks and Finance 224-7, Financial Regulation after the Global Recession, 157-70). The Federal Reserve total commitment by September 2009 was $5.9 trillion, or 50.8 percent of the total, and the use was $1.6 trillion, or 53 percent of the total. The role of the government should be to provide the institutions and governance rules that facilitate private sector activities that increase the productivity of the economy, or output per unit of input, by innovation or new forms of production and the organization of productive activities (Pelaez and Pelaez, Government Intervention in Globalization, 1-12). Second, content with the supposition that the fiscal stimulus would be sufficient to promote growth and job creation, government policy engaged in profound and complex legislative restructurings, regulatory shocks and mandates that changed significantly the existing organizational and operational models of private sector business of all sizes. The largest fiscal deficits since World War II create the specter of an unsustainable government debt. The eventual unwinding of the monetary stimulus by the Fed together with the burden of the government debt creates the expectation of large, widespread tax increases and higher interest rates. The result of this inopportune profound change is uncertainty in decisions of investment by business and families and hiring by business of all sizes. Even if the massive stimulus helped partially to turn around the economy, which is debatable, the inopportune change and expectations of higher taxes and interest rates flatten the growth path of the economy and perpetuate high rates of unemployment and underemployment.
IA Monetary Policy. A major threat to growth is the unwinding of the $1.9 trillion of long-term securities purchased by the Fed with resulting increase in long-term interest rates and the eventual increase of short-term interest rates from the current level of 0 to 0.25 percent for the fed funds rate. Fed policy has consisted of three measures: (1) fixing the fed funds rate near zero; (2) credit facilities; and (3) quantitative easing. First, the Fed has been aggressive and volatile in fixing the rate of fed funds or interbank loans of reserves deposited at the Fed, which is a proxy of the interest cost of an additional unit of bank lending. The Fed lowered the fed funds rate from 6.50 percent in May 2000 to 1.00 percent by June 2003 and left it at 1.00 percent until June 2004 when it increased it to 1.25 percent and then rapidly increased it to 5.25 percent by June 2005. In rollercoaster fashion the Fed lowered the rate to 4.25 percent by September 2007 rapidly lowering it to 0-0.25 percent by December 2008. The Fed lowered the fed funds rate by 525 basis points followed by an increase of 425 basis points and then by a decrease of 425 basis points in a time period of six years (http://www.federalreserve.gov/fomc/fundsrate.htm ). The policy counterfactual posits that the credit crisis originated in four excessive types of stimuli in 2001-2004 (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4): (1) the interruption of auctions of the 30-year Treasury in 2001-2005 that caused purchases of mortgage-backed securities equivalent to a reduction in mortgage rates; (2) the reduction of the fed funds rate by the Fed to 1 percent and its maintenance at that level between June 2003 and June 2004 with the implicit intention in the “forward guidance” of maintaining that rate indefinitely if required in avoiding “destructive deflation”; (3) the housing subsidy of $221 billion per year; and (4) the purchase or guarantee of $1.6 trillion of nonprime mortgage-backed securities by Fannie Mae and Freddie Mac. The combined stimuli mispriced risk, causing excessive risk and leverage as the public attempted to obtain higher returns on savings. Second, the Fed used about 11 facilities of monetary policy during the crisis (Pelaez and Pelaez, Financial Regulation after the Global Recession, Table 6.3, 160-1). Third, when policy interest rates are near zero, the central bank can manage its balance sheet by purchasing long-term securities. This quantitative easing can rebalance investment portfolios, causing increases in prices of long-term securities. The resulting decline in long-term interest rates could increase investment and stimulate economic recovery as analyzed by Ben Bernanke and Vincent Reinhart (cited in Pelaez and Pelaez, Regulation of Banks and Finance, 224, The Global Recession Risk, 103-7). The current balance sheet of the Fed is bloated to $2.3 trillion with a portfolio of long-term securities of $1.9 trillion, consisting of $712 billion of Treasuries, $159 billion of federal agency debt securities and $1117 billion of mortgage-backed securities (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1 ).
IB Fiscal Policy. The strategy was for Congress to appropriate close to $1 trillion of government spending and then concentrate on the profound restructuring of the economy by complex legislation and regulation. The cornerstone of fiscal policy was the American Reinvestment and Recovery Act of 2009 (ARRA) with initial appropriated investment of $787 billion, consisting of tax cuts, incentives to investment, support to people affected by the recession, aid to states and direct investment by the government (http://www.whitehouse.gov/sites/default/files/microsites/Estimate-of-Job-Creation.pdf ). The intention of ARRA was “to save and create jobs, as well as to cushion the economic downturn and make crucial public investments. The Administration has summarized the results by looking at the number of jobs (relative to the baseline) as of 2010Q3. Our finding was that the ARRA would increase employment relative to the baseline in this quarter by approximately 3.5 million” (Ibid, 2-3). The Council of Economic Advisors (CEA) finds in its report of Jul 14, 2010, that “the ARRA has raised employment relative to what it otherwise would have been by between 2.5 and 3.6 million” and that “ARRA has raised the level of GDP as of the second quarter of 2010, relative to what it otherwise would have been by between 2.7 and 3.2 percent” (http://www.whitehouse.gov/files/documents/cea_4th_arra_report.pdf ). The “what it otherwise would have been” is a counterfactual on which there will never be proof (on counterfactuals see Pelaez and Pelaez, Globalization and the State, Vol. I, 17, 124-5).
II Employment Situation. The possibility of failure of the stimulus policy is shown by the dire employment situation in the US. For many people willing to work the recession has not ended and the rest fear the uncertainty of losing their jobs or low salaries and wages in a weak labor market. The alleged long-term benefits of the legislative restructuring and regulatory shocks may constitute a tradeoff consisting of persistent unemployment and underemployment. The monthly report on employment by the Bureau of Labor Statistics (BLS) continues to show 27 million people in job stress in July: 14.6 million unemployed (of whom long-term unemployed of 6.6 million or 44.9 percent who have been unemployed more than 27 weeks), 8.5 million working part-time because they could not find a better job, 2.6 million marginally attached to the labor force (who wanted and were available for work and had searched for work in the prior 12 months) and 1.2 million discouraged workers (who believe there is no job for them or had not searched for work in the prior four weeks) (http://www.bls.gov/news.release/pdf/empsit.pdf ). Total nonfarm payroll employment fell by 131,000 in July, the unemployment rate remained at 9.5 percent, 143,000 temporary workers finished their job for 2010 census and “private-sector payroll employment edged up by 71,000” (Ibid, 1). The average work week for employees on nonfarm payrolls reached 34.2 hours for an increase of 0.1 hour and hourly earnings grew by 4 cents, or 0.2 percent, reaching $22.59 in July. Private sector job creation was reduced to only 31,000 in Jun while the overall loss of jobs was revised to 221,000.
III Growth Slowdown and Jobs. The growth rate and job creation in the expansion of the economy away from recession are subpar in this recession compared to others in the past. Four recessions and their corresponding job creation are considered below, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): 1957-1958, 1973-1975, 1981-1983 and the ongoing 2008-2010. The data for the three earlier contractions illustrate that the growth rate and job creation in the current 2008-2010 recession are inferior. The two sharp recessions of 1957 and 1958 are considered in Tables 1 and 2. The data in Table 1 show the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The 1950s recession had negative growth rates ranging from -1.0 percent to -10.4 percent followed by growth rates ranging from 8.3 percent to 10.5 percent. The 1970s recession had growth rates ranging from -1.6 percent to -4.8 percent followed by growth rates ranging from 3.1 percent to 9.4 percent in 1Q76 (not shown in the table because of space limitations, see http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=1973&LastYear=1977&3Place=N&Update=Update&JavaBox=no ).
Table 1, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| Quarter | 1957 | 1958 | 1959 | 1973 | 1974 | 1975 |
| I | 2.5 | -10.4 | 8.3 | 10.6 | -3.5 | -4.8 |
| II | -1.0 | 2.5 | 10.5 | 4.7 | 1.0 | 3.1 |
| III | 3.9 | 9.7 | 10.5 | -2.1 | -3.9 | 6.9 |
| IV | -4.1 | 9.7 | -0.5 | 3.9 | -1.6 | 5.3 |
Table 2 provides the number of monthly change in jobs also seasonally adjusted. Large losses in jobs during the recession were followed by large increases in jobs. The US economy, similar to those of other countries, has been able to recover growth and jobs in past recession by expansion paths resembling V shapes.
Table 2, Monthly Change in Jobs, Numbers SA
| Month | 1957 | 1958 | 1959 | 1973 | 1974 | 1975 |
| Jan | -42 | -308 | 393 | 350 | 69 | -360 |
| Feb | 210 | -501 | 206 | 397 | 149 | -378 |
| Mar | 58 | -276 | 329 | 269 | 42 | -270 |
| Apr | 92 | -274 | 304 | 170 | 89 | -186 |
| May | -89 | -114 | 229 | 190 | 163 | 160 |
| Jun | -83 | -1 | 129 | 240 | 55 | -104 |
| Jul | 56 | 125 | 125 | 25 | 32 | 249 |
| Aug | 6 | 106 | -466 | 255 | -15 | 386 |
| Sep | -196 | 283 | 91 | 115 | -5 | 78 |
| Oct | -167 | -21 | -69 | 324 | 13 | 303 |
| Nov | -208 | 458 | 276 | 304 | -368 | 144 |
| Dec | -172 | 145 | 540 | 126 | -602 | 338 |
Source: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
The corresponding data for the 1980s recession and the recession after 2008 are shown in Tables 3 and 4. The NBER dates another recession in 1980 that lasted about half a year. If the two recessions of the 1980s and after 1981 are combined, the impact on lost GDP is comparable to the revised 4.1 percent drop of the recession in 2008-2009. The recession in 1981-1982 is quite similar on its own to the 2008-2009 recession. Table 3 provides the BEA quarterly growth rates of GDP in SA yearly equivalents. There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2008-2009 ranging in rate from -0.7 percent to -6.8 percent. The striking difference is that in 2Q1983 GDP grew at the pace of 9.3 percent while struggling to grow at 2.4 percent in 2Q2010. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983. The key difference may be found in the negative incentive to business and household investment and business hiring from the structural shock to business models resulting from legislative restructuring with alleged benefits in the long-term but adverse short-term growth and jobs effects.
Table 3, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| Quarter | 1981 | 1982 | 1983 | 2008 | 2009 | 2010 |
| I | 8.6 | -6.4 | 5.1 | -0.7 | -4.9 | 3.7 |
| II | -3.2 | 2.2 | 9.3 | 0.6 | -0.7 | 2.4 |
| III | 4.9 | -1.5 | 8.1 | -4.0 | 1.6 | |
| IV | -4.9 | 0.3 | 8.5 | -6.8 | 5.0 |
The monthly change in jobs in the 1980s and the current recessions are provided in Table 4. Rapid growth resulted in accelerated job creation in 1983 while the economy in 2010 is maintaining 27 million people in job stress. The final column in Table 4 shows the mediocre job creation by the private sector that is frustrated by legislative restructuring, regulatory shocks and mandates and expected major increases in taxes and interest rates.
Table 4, Monthly Change in Jobs, Numbers SA
| Month | 1981 | 1982 | 1983 | 2008 | 2009 | 2010 | Private |
| Jan | 95 | -327 | 225 | -10 | -779 | 14 | 56 |
| Feb | 67 | -6 | -78 | -50 | -726 | 39 | 62 |
| Mar | 104 | -129 | 173 | -33 | -753 | 208 | 158 |
| Apr | 74 | -281 | 276 | -149 | -528 | 313 | 218 |
| May | 10 | -45 | 277 | -231 | -387 | 432 | 74 |
| Jun | 196 | -243 | 378 | -193 | 515 | -221 | 31 |
| Jul | 112 | -343 | 418 | -210 | -346 | -131 | 71 |
| Aug | -36 | -158 | -308 | -334 | -212 | ||
| Sep | -87 | -181 | 1114 | 271 | -225 | ||
| Oct | -100 | -277 | 271 | -554 | -224 | ||
| Nov | -209 | 124 | 352 | -728 | 64 | ||
| Dec | -278 | -14 | 356 | -673 | -109 |
Source: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
http://www.bls.gov/schedule/archives/empsit_nr.htm#2010
IV Financial Turbulence. Four economic and policy factors have caused significant financial turbulence: (1) doubts on the growth of China, affecting commodity prices and interregional trade in Asia; (2) sovereign risk problems and bank exposures in Europe; (3) growth and job slowdown in the US; and (4) legislative restructuring in the US. In addition, the carry trade from the near zero short-term interest rate imposed by the Fed to high-risk exposures in commodities, exchange rates and equities is a major cause of harmful financial turbulence in global financial markets (Pelaez and Pelaez, Globalization and the State, Vol. II, 203-4, Government Intervention in Globalization, 70-4). Table 5 provides a summary of turbulence in stocks, commodities, the dollar and Treasury yields. The columns provide the dates of the recent peaks and troughs of financial variables and the percentage change from recent peak to trough, peak to Aug 6 and change in the week ending on Aug 6. There has been significant recovery in global equity markets, appreciation followed by depreciation of the dollar and increase in commodity prices. The uncertainty is reflected in the decline of the 10-year Treasury yield from 3.9866 on Apr 5 to 2.822 on Aug 6 in what appears a “realize profit and run” strategy with use of high-quality fixed income securities as temporary haven from financial turbulence.
Table 5, Stocks, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | % Trough | % 8/6 | Week 8/6 | |
| DJIA | Apr 26 | Jul 2 | -13.6 | -4.9 | 1.8 |
| S&P 500 | Apr 23 | Jul 2 | -16.0 | -7.9 | 1.8 |
| NYSE Fin | Apr 15 | Jul 2 | -20.3 | -10.3 | 1.3 |
| Dow Global | Apr 15 | Jul 2 | -18.4 | -8.6 | 2.8 |
| Asia Pacific | Apr 15 | Jul 2 | -12.5 | -4.5 | 2.7 |
| Shanghai | Apr 15 | Jul 2 | -24.7 | -16.0 | 0.8 |
| Europe STOXX | Apr 15 | Jul 2 | -15.3 | -7.4 | 1.4 |
| Dollar | Nov 25 | Jun 25 | 22.3 | 13.9 | -1.8 |
| UBS Com | Jan 6 | Jul 2 | -14.5 | -6.7 | 0.8 |
| 10 Year T | Apr 5 | Aug 6 | 3.986 | 2.822 |
Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=topnav_2_3004
V Economic Indicators. The expansion of the economy continues but at slower pace. The Jul index of business conditions of the Institute for Supply Management (ISM) appears stable with a decline of only 0.7 point but the leading indicator of new orders declined by 5 points and inventories increased by 4.4 points, suggesting drops in new orders and sales (http://www.ism.ws/ISMReport/MfgROB.cfm See http://blogs.ft.com/econoclast/2010/08/02/ism-survey-confirms-sharp-slowdown-in-us-economy/#more-101 ). All major economies, with the exception of Germany, are experiencing slower expansion of industrial activity (http://blogs.wsj.com/economics/2010/08/02/world-wide-factory-activity-by-country-7/ ). The nonmanufacturing index of the ISM gained 0.5 point in Jul while new orders gained 2.3 points and inventories declined by 3 points, which is much better at the margin than the index for industry (http://www.ism.ws/ISMReport/NonMfgROB.cfm ). Construction spending increased 0.1 percent in June relative to May partly because of revisions but the cumulative value in the first six months of 2010 fell by 11.2 percent relative to the same period in 2009 (http://www.census.gov/const/C30/release.pdf ). New orders for manufactured goods fell 1.2 percent in Jun after dropping 1.8 percent in May (http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf ). Personal income and personal consumption expenditures were flat in Jun (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm ). The Fed estimates that consumer credit fell at the annual rate of 3.25 percent in the second quarter, revolving credit dropped at the annual rate of 9.5 percent and nonrevolving credit was flat (http://www.federalreserve.gov/releases/g19/Current/ ). The index of pending home sales of the National Association of Realtors (NAR) fell 2.6 percent in Jun and 18.6 percent relative to Jun 2009 (http://www.realtor.org/press_room/news_releases/2010/08/pending_ease ). Initial jobless claims seasonally adjusted increased by 19,000 in the week ending Jul 31 to reach 479,000. The unadjusted claims were much lower at 399,570, decreasing by 14,247 while they were at 466,695 in the comparable 2009 week (http://www.dol.gov/opa/media/press/eta/ui/current.htm ).
VI Interest Rates. The yield curve of Treasuries continues to shift downward with the 2-year declining to 0.51 percent from 0.55 percent a week ago and 0.62 percent a month ago and the 10-year falling to 2.82 percent from 2.91 percent a week ago and 3.01 percent a month ago. The10-year government bond of Germany traded at 2.51 percent for negative spread relative to the comparable Treasury of 0.31 percent (http://markets.ft.com/markets/bonds.asp?ftauth=1281275606639 ). There is evident parking of cash in government securities and cash-rich balance sheets of corporations. There could be several factors combined or in isolation that can channel that cash into risk exposures again in a relief rally before the end of the year that could be magnified by M&A using corporate cash and leverage to benefit from consolidation opportunities: (1) increase in the growth rate of the economy and job creation; (2) policy shift more attentive to encouraging business and household investment and business hiring; and (3) election results. Interest rates could climb much faster than they declined not only because of the flows into riskier assets but also because of continuing high deficits and the Fed balance sheet. Financial turbulence is far from over with the threat of continuing growth slowdown and persistent job stress of 27 million persons.
VII Conclusion. There is evident need for a policy shift to promote growth and job creation by encouraging investment by business and households and hiring by business. Combining many conflicting short-term and long-term objectives may result in far many targets than available effective policy instruments. (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)
http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10 )
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