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Economy Adds 121,000 Jobs in June - Economy Slows Down

Prof. Peter Morici - 7/7/2006

Today, the Labor Department reported the economy added 121,000 payroll jobs in June. The consensus forecast was 170,000, and my forecast published by Reuters was 125,000. The revised figures for April and May were 112,000 and 92, 000. Over the past three months jobs gains have averaged only 108,000. This is well south of the number needed to keep unemployment from rising.

Subpar jobs growth in April, May and June indicate the economy is slowing, as Wall Street analysts and Fed policymakers anticipated. A weaker housing market and higher gas prices have clamped down auto and retails sales, and this is feeding back into business investment, construction and jobs creation.

Wages were up 0.5 percent in June, after rising less than 0.1 percent in May. The June jump in hourly wages should be viewed together with the modest increase in May. Coupled with modest jobs gains, these data indicate wages are under control.

Implications for Fed Policy

These jobs and wage data indicate slowing labor markets. Coupled with strong productivity growth, higher wages are not likely to push up key measures of core inflation.

As a guide to monetary policy, inflation targeting works when domestic labor markets and industrial bottlenecks are pushing up prices but not, as now, when U.S. inflation is being manufactured offshore in international oil and resource markets. If allegiance to doctrine prevents Bernanke from recognizing these facts of globalization, the Fed will drive up interest rates too much and cast the economy into the abyss.

Inflation targeting is a great idea if the policy tools at hand can harness prices but that is just not the situation.

A Two-Tiered Labor Market

Overall, conditions in labor markets remain mixed. Shortages continue for workers with key technical skills. For example, business and information technology services and health care remain strong for workers with technical specialties. In some parts of the country, construction workers are scarce.

Meanwhile, workers with only high school or a few years of college, without key technical skills, face mounting challenges securing positions offering good pay and health benefits. In the Midwest, workers taking buyouts from automakers or laid off by suppliers will not find new jobs that pay as well. Conditions remain difficult for workers in those portions of the Southeast historically dependent on textile and furniture industries.

We continue to have a two-tiered labor market. The top quartile has never had it better; but for everyone else, the future is worrisome. For many workers, real incomes lag inflation, and plummeting living standards will follow the end of the housing boom and easy credit. This maldistribution of opportunities and rewards explains why President Bush cannot convince most Americans the economy is on solid ground, and will prove an albatross for Republicans this November.

Manufacturing gained 15 thousand jobs in June, after losing 8 thousand jobs in May. Overall, manufacturing has lost about 3 million jobs since 2000. By the patterns of past expansions, it should have regained about 2 million jobs by now.

Chinese currency market manipulation and an artificially inexpensive yuan play key roles, destroying jobs in U.S. manufacturing and high-tech services that pay above average wages. These conditions generally suppresses wages in communities dependent on these industries and are an important factor creating a “haves” and “haves not” economy.

Unemployment remained steady 4.6 percent, largely because many adults chose to not participate in the job market. The adult labor force participation rate remains significantly lower than when George Bush took over stewardship of the economy. If adults were participating in the job market at 2000 levels, 2.6 million more people would be looking for work and unemployment would exceed 6 percent.