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Economy Added 88,000 Jobs in April

Prof. Peter Morici - 5/7/2007

Friday, the Labor Department reported the economy added 88,000 payroll jobs in April, down from 177,000 in March. In the first quarter, the economy added 497,000 payroll jobs, or about 166,000 jobs per month. Somewhat slower employment growth in April is consistent with the recent pickup in productivity growth and a moderately expanding economy. New home construction is likely bottoming out. Continued strong consumer purchases and an up tick in business investment and commercial construction should lift GDP growth to above 2 percent in the second quarter.

Wages increased a moderate 4 cents per hour or 0.2 percent. Moderate growth and rising labor productivity should keep wage inflation in check.

Separately, the household survey, which includes the self employed, shows the unemployment rate at 4.5 percent in April, up from 4.4 percent in March. More importantly, the survey indicates another 611,000 .adults left the labor force, as the ranks of discouraged workers continue to swell.

Despite the Bush Administration's exhortations, this unemployment rate is hardly low by historical standards. In November 2000, when George W. Bush won the presidency, unemployment was 3.9 percent, and the proportion of adults working or seeking employment was much higher than today. Were the same percentage of adults participating in the workforce today as in 2000, the unemployment rate would be about to 6.2 percent.


Manufacturing, Construction and the Quality of Jobs

The economy is adding lots of jobs for college graduates, especially those with technical specialties in finance, health care, education, and engineering. However, for high school graduates without specialized skills or training, jobs offering good pay and benefits remain tough to find.

Historically, manufacturing and construction offered workers with only a high school education the best pay, benefits and opportunities for skill attainment and advancement. Troubles in these industries push ordinary workers into retailing, hospitality and other industries where pay often lags.

Durable goods manufacturing remains robust but competition from Asian imports, benefiting from undervalued currencies and other subsidies, limits employment.

In April, manufacturing lost 19,000 jobs, and over the last 84 months, manufacturing has shed 3.2 million jobs. Were the trade deficit cut in half, manufacturing would recoup about 2 million of those jobs.

Over the past year, the dollar has weakened against the euro, where exchange rate movements have only small effects on exports and imports. Against the important Chinese yuan, the dollar remains too high, and the yuan sets the pattern for other Asian currencies, which are critical to reducing the non-oil trade deficit and instigating a recovery in manufacturing employment.

Unless Treasury Secretary Paulson finds a way to persuade China to revalue the yuan, U.S. manufactures will continue to compete against massively subsidized Asian products that destroy more manufacturing jobs each month.

Construction employment dropped by 11,000. Housing starts continue to flag, though prospects seem a bit better for commercial construction. Most of the new job opportunities will be in government infrastructure and commercial projects, where tightening industrial capacity should instigate should new projects.


Outlook for GDP Growth and the Stock Market

In 2007, growth is expected to be in the range of 2 to 2.3 percent, without tangible steps to reduce the trade deficit or lower interest rates. At that pace, the unemployment rate will creep up or not change much.

Slow growth results not from economic fundamentals but from conscious policy choices at Treasury and the Federal Reserve. Treasury’s inability to manage the international value of the dollar, as China does its yuan, both slows U.S. productivity growth and drives up global oil and other commodity prices. This leaves the Federal Reserve correctly concerned about inflation and unwilling to cut interest rate cuts. Ultimately, Treasury’s inability to manage the dollar exchange rate is responsible for GDP growth below 3.0 to 3.5 percent, which could easily be attained.

Higher global oil prices will continue to push up U.S. inflation but the Federal Reserve can do little to dampen these pressures by raising short-term U.S. interest rates. With moderate growth ahead, look for the Federal Reserve to stand on the sidelines until at least September. Interest rates will remain reasonably steady over the next four months.

Stock prices will continue to outperform the U.S. economy. Many large U.S. companies earn a good deal of their profits abroad. The combination of strong growth in Asia, coupled with moderate growth in the United States, is good for their bottom line.

A weaker dollar makes U.S. equities a particular bargain for foreign investors, especially in Europe. Large U.S. multinationals, earning significant profits in Asia, are a great investment opportunity for Europeans who sit on strong euros and pounds but have few good investment options at home.

Surging corporate profits, moderate growth and steady interest rates at home, and more robust foreign demand for U.S. equities should power up U.S. stock prices. The bull market will power ahead into 2008, and the Dow should breach 14,000 by next spring.