Guy Berger

From the Economist: America's Economy / Heading in the wrong direc

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America's economy

Heading in the wrong direction

Mar 8th 2008 | WASHINGTON, DC

From Economist.com

More signs that America's economy is in poor fettle

ReutersJobs.jpg

IF ANY more evidence is needed that America's economy is perilously close to recession, it was delivered this week. On Friday March 7th the Bureau of Labour Statistics announced that the economy lost 63,000 non-farm jobs in February, following a smaller decline in employment in January. Even with all the bearish talk recently, these results were unexpectedly bad; forecasters had projected a small increase, not the largest drop in five years. The unemployment rate edged down from 4.9% to 4.8%, but only because there were fewer unemployed people actively searching for work.

On the same day the Federal Reserve announced that it would make additional loans of up to $100 billion available to prevent renewed strains in money markets from hurting the economy. The question for many is now turning from whether a recession is on the way to how long and how deep it will be.

The worst jobs news is still in the house-building sector, which is reeling from the effects of plummeting home prices. Since an industry high point in 2006 some 209,000 trade jobs (such as plumbers and electricians) and 137,000 construction jobs have melted away. The Mortgage Bankers Association reported on Thursday that foreclosures are up by 71% from a year ago.

Mortgage-delinquency rates hit the highest point since 1985. And rates of delinquency among prime borrowers also increased as the crisis shifts further beyond sub-prime borrowing to affect safer loans. Many Americans are seeing their home value sink below the size of their mortgages, giving them an incentive to ditch their property and stack up higher losses for banks. That would push prices down even further and rattle already teetering financial markets.

Collapsing housing markets are partly the result of struggling American manufacturing. Firms shed 52,000 jobs last month, mostly in durable goods such as cars. And domestic consumer spending is too weak to keep the sector from contracting. The outlook looks negative; the Federal Reserve's latest "Beige Book" survey indicates that some manufacturers are cutting back on plans for capital spending and hiring. The survey also found that weakness in housing and manufacturing is spreading to other industries such as retailing and commercial construction, both of which lost jobs last month.

But the news is not all bad. Given the weak dollar and high demand from Asia, exports of everything—from telecommunications equipment to tractors—are up, helping to mitigate the pain. The weak dollar is also giving a boost to overseas tourism—up by some 7% in 2007. All of which kept the economy growing in the fourth quarter—but only barely. And a $150 billion fiscal-stimulus package will take full effect in May, leading some forecasters to predict a short and mild recession.

Aggressive monetary easing from the Fed could also help and markets are anticipating big cuts, perhaps of half or even three-quarters of a percentage point from the current rate of 3%. The central bankers are set to meet to ponder their next move on March 18th. Still, the Fed might not have much more room for manoeuvre. Inflation in January was uncomfortably high, at 4.3%. The Fed expects inflation to abate in coming months, and sluggish consumer spending suggests it will, but talk of stagflation already abounds.

Even if the recession is brief and shallow, the recovery could take a lot longer. Housing prices still have room to fall. States such as California, Florida and Nevada have been battered by their speculative housing bubbles and still have to deal with large surplus stocks of homes. The industrial mid-west is in the midst of a long-term economic decline, and if global demand recedes, currently robust exports will tumble, too. The weak property market will also discourage Americans from moving around the country to pursue opportunities elsewhere, exacerbating the pain for some of the worst-off.

Most politicians still studiously avoid using the r-word. But with the outlook worsening, expect to hear it more often in Washington, DC. And expect policymakers to compete to come up with the most ambitious new plans to end the swoon.

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Thanks Guy. Two questions, if you don't mind.

The unemployment rate edged down from 4.9% to 4.8%, but only because there were fewer unemployed people actively searching for work.

What's the story on this? Why is inactivity rising in America? (I understand that benefits are nothing to write home about over there :) - so the incentives to find work are a good deal stronger than over here.)

The weak dollar is also giving a boost to overseas tourism—up by some 7% in 2007.

Is that a historically high level? I had a feeling that overseas tourism in the US fell off remarkably after the invasion of Iraq.

MG

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Is that a historically high level? I had a feeling that overseas tourism in the US fell off remarkably after the invasion of Iraq.

MG

Not in NYC (based on personal observation). For that matter, there seem to be more europeans buying apartments as part-time residences in the city now than there are actual residents buying them as primary homes.

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Thanks Guy. Two questions, if you don't mind.

The unemployment rate edged down from 4.9% to 4.8%, but only because there were fewer unemployed people actively searching for work.

What's the story on this? Why is inactivity rising in America? (I understand that benefits are nothing to write home about over there :) - so the incentives to find work are a good deal stronger than over here.)

This is an answer based purely on speculation, but usually a decline in the unemployment rate during a period of weakening economic activity is attributed to "discouraged workers" -- ie, workers who give up on finding work because they simply can't find one and drop out of the labor force. (In the US the UE rate is defined as [people actually working] / [people actually working + not working but actively looking for a job].)

Between Jan and Feb the labor force participation rate ([people actually working + unemployed but actively looking for a job] / [over-18 civilian non-institutionalized population]) fell by 0.2 percentage points. However, I'm not sure how much can be explained by "discouraged workers" -- I will try to check.

I did find this page on the Department of Bureau of Labor Statistics's website -- however, it compares Feb 2007 to Feb 2008 (apparently this data, unlike the unemployment rate, is not seasonally adjusted, making month-to-month comparisons unreliable). It looks like out of the 350K people or so leaving the labor force over the past year, about 50% say they "want a job" but only a very small fraction (about 5% or so) qualify as "discouraged" by BLS standards. Of course, we would ideally want to compare Jan to Feb.

The weak dollar is also giving a boost to overseas tourism—up by some 7% in 2007.

Is that a historically high level? I had a feeling that overseas tourism in the US fell off remarkably after the invasion of Iraq.

MG

1) We are talking about rates of increase rather than levels.

2) Iraq or no Iraq, as traveling here gets cheaper more and more people will do it.

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The industrial mid-west is in the midst of a long-term economic decline

Yes, there's a lot more pain ahead in the State I live in.

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This is an answer based purely on speculation, but usually a decline in the unemployment rate during a period of weakening economic activity is attributed to "discouraged workers" -- ie, workers who give up on finding work because they simply can't find one and drop out of the labor force. (In the US the UE rate is defined as [people actually working] / [people actually working + not working but actively looking for a job].)

I agree with Guy.

I agree wtih Guy. The UE rate is a joke. It's as ludicrous as the CPI.

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This is an answer based purely on speculation, but usually a decline in the unemployment rate during a period of weakening economic activity is attributed to "discouraged workers" -- ie, workers who give up on finding work because they simply can't find one and drop out of the labor force. (In the US the UE rate is defined as [people actually working] / [people actually working + not working but actively looking for a job].)

I agree with Guy.

I agree wtih Guy. The UE rate is a joke. It's as ludicrous as the CPI.

Well, I wouldn't call either a joke -- I just think that like a lot of statistics, you need to know what you are dealing with.

Guy

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The weak dollar is also giving a boost to overseas tourism—up by some 7% in 2007.

Is that a historically high level? I had a feeling that overseas tourism in the US fell off remarkably after the invasion of Iraq.

MG

1) We are talking about rates of increase rather than levels.

2) Iraq or no Iraq, as traveling here gets cheaper more and more people will do it.

Oh yes. I didn't phrase the question properly. I meant, has this 7% improvement taken tourism to historically high levels?

MG

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The unemployment rate edged down from 4.9% to 4.8%, but only because there were fewer unemployed people actively searching for work.

What's the story on this? Why is inactivity rising in America? (I understand that benefits are nothing to write home about over there :) - so the incentives to find work are a good deal stronger than over here.)

This is an answer based purely on speculation, but usually a decline in the unemployment rate during a period of weakening economic activity is attributed to "discouraged workers" -- ie, workers who give up on finding work because they simply can't find one and drop out of the labor force. (In the US the UE rate is defined as [people actually working] / [people actually working + not working but actively looking for a job].)

Between Jan and Feb the labor force participation rate ([people actually working + unemployed but actively looking for a job] / [over-18 civilian non-institutionalized population]) fell by 0.2 percentage points. However, I'm not sure how much can be explained by "discouraged workers" -- I will try to check.

I did find this page on the Department of Bureau of Labor Statistics's website -- however, it compares Feb 2007 to Feb 2008 (apparently this data, unlike the unemployment rate, is not seasonally adjusted, making month-to-month comparisons unreliable). It looks like out of the 350K people or so leaving the labor force over the past year, about 50% say they "want a job" but only a very small fraction (about 5% or so) qualify as "discouraged" by BLS standards. Of course, we would ideally want to compare Jan to Feb.

Thanks for that table, Guy. I worked out, circuitously, that the US had an inactivity rate of 34.75% in February. That really shocked me! The UK inactivity rate (November) is 25.3%. I assume the "total not in labour force" excludes kids below legal school leaving age (16 here) and people over retirement age (60 f & 65 m here).

I was also surprised to see inactivity has risen by 1.351 million (1.7%) over the past year; the 5.6% increase in discouraged workers is still too small in absolute terms (21,000) to make much of an impact on the big numbers. Something else - something major - seems to be happening, apart from a few more people thinking there aren't any jobs.

MG

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Ah, I just fell in. The US has a population of about 4 million a year, so excluding 17 years' worth of kids reduces 300 m to 232 m - which is, near as dammit, the number I'd calculated as the working age population (231 m). So it looks as if what's happening to inactivity may well be demographic - baby boomers hitting their sixties and effectively retiring, even though you don't count it as such. And these numbers will be larger than the numbers dying of old age.

MG

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