Confirmed: America’s jobs crisis
Mohamed El-Erian
May 4, 2012
Friday’s US jobs data sound a warning that should be heard well beyond economists and market watchers.
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With just 115,000 new jobs in April, the US economy is not creating enough employment opportunities to make a dent in the 12.5m jobless Americans in the labour force, of which a stunning 5.1m are long-term unemployed. Moreover, the disappointing monthly number managed to fall short of analysts’ massively subdued consensus expectation of 160,000, highlighting yet again the unusual sluggishness of the labour market.
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Americans that do have jobs are experiencing no wage growth. Measures for both April hourly earnings and hours worked came in flat, confirming that purchasing power for most workers is failing to keep up with inflation. This is consistent with earlier data on the personal savings rate, which has fallen to levels that suggest a quickly eroding precautionary cash cushion for too many Americans.
.And then there is the labor participation rate which measures the number of adults in the labor force. This declined yet again and, at 63.6 per cent, is at a level last seen in 1981. In addition to highlighting the secular headwinds to income and wealth generation, this makes a mockery of the published unemployment rate of 8.1 per cent — a number that would be over 10 per cent if discouraged Americans had not dropped out of the labour force in their millions over the last few years.
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The economic implications are clear. On current trends, consumption (by far the largest component of gross domestic product) is in no position to be a sufficiently dynamic engine of growth – and this at a time of considerable headwinds emanating from a recession-hit Europe.
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Moreover, the balance of risks is tilted to the downside given a potential year-end “fiscal cliff” that, absent proper political reactions, would suck out some 4 per cent of GDP in purchasing power, and do so in a disorderly fashion.
Friday’s disappointing jobs report will also worsen Washington’s highly polarised politics. Already, initial reaction from there suggest that, rather than act as a catalyst to bring the political class together to address a persistent national problem, the numbers are fueling conflicting political narratives and greater polarisation – thereby reducing further the probability of any timely convergence towards the type of common analysis and common vision that are needed.
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With virtually all government entities essentially paralysed by political gridlock, the Federal Reserve will soon confront yet another lose-lose policy dilemma. Does it renew its unconventional activism using inevitably blunt tools that involve a growing set of collateral damage and intended consequences; or does it stick to the sidelines and watch the economy weaken further in the summer?
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And then there are the social consequences. Friday’s numbers speak to the growing stress on America’s already-stretched safety nets, as well as its growing income inequality. It also points to the possibility (though, fortunately, not yet a probability) of a lost generation. With teenage joblessness stuck at 25 per cent, too many young people face the risk of going from being unemployed to becoming unemployable.
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To many, this analysis will seem overly downbeat. It is not. It is a reflection of a multi-faceted unemployment crisis that politicians, both in America and Europe, are failing to comprehend, unite around, and respond to.
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Let us hope that this latest set of data becomes a call for action. If not, I worry greatly that facts on the ground will unfortunately warrant future analyses to be even more disheartening.
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