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Economy Added 128, 000 Jobs in August

Prof. Peter Morici - 9/1/2006

Today, the Labor Department reported the economy added 128,000 payroll jobs in August. My forecast and the consensus forecast were 125,000 new jobs. The revised figure for July jobs growth was 121,000. Over the last five months, the economy has added 119,000 jobs per month. This is well below the number needed to accommodate labor force growth and keep unemployment from rising.

The weakening housing market has slowed consumer spending, except for gasoline, and this is slowing business investment, construction and jobs creation.

The unemployment rate fell to 4.7 from 4.8 percent in July, because a large number of adults left the labor force. The adult labor force participation rate remains well below its first quarter 2000 level, and were the same percentage of adults seeking employment now as then, unemployment would be well above six percent.

In August, wages were up only 0.1 percent. Sub par jobs growth indicates the economy is slowing significantly, and underperforming its potential. In the months ahead, loosening labor market conditions will put a lid on wages and help contain inflation but ordinary workers will pay a heavy toll in declining real incomes. Inflation will continue to outpace wages for many workers.

Conditions in labor markets remain mixed. Workers with key technical skills, for example in construction, finance, information technology, and health care, continue to find good opportunities, and their incomes easily outpace inflation. However, workers with only high school or a few years of college, without key technical skills, face mounting challenges finding jobs offering good pay and health benefits.

Conditions in manufacturing remain poor. In August, manufacturing lost 11 thousand jobs in August, after shedding 23 thousand jobs in July, and manufacturing has lost more than three million jobs since 2000.

Had the current economic expansion followed the pattern of past recoveries, two million manufacturing jobs would have been regained. The trade deficit and overvalued dollar against the Chinese yuan and other Asian currencies significantly contribute to employment woes in manufacturing, as do other industrial policies that subsidize Asian exports and throw up barriers to U.S. sales into the region.

Construction added 17 thousand jobs reflecting improving conditions in the commercial construction sector. Looking forward, improvements in commercial construction should offset the slowdown in the housing sector.

Overall, the two-tiered labor market continues. The top quartile has it good; but for everyone else, the future is worrisome. For many workers, real incomes lag inflation, and the flagging housing market will drive down living standards. The skewed distribution of opportunities explains why President Bush cannot convince most Americans the economy is on solid ground, and the Republicans are in danger of losing control in Congress.

Weak jobs growth indicates higher interest rates are slowing the economic expansion and inflation will cool in the months ahead. The Federal Reserve should not raise interest rates when it meets September 20.

Unfortunately, August consumer price data, which will be released on September 15, will likely reflect the residual effects of first half oil price increases. The Federal Reserve should resist overreacting to those data, lest it risk killing the economic expansion altogether and a long bout with stagflation or a even a recession.