What today's job number tells us, assuming that the headline report is correct, there are some numerical discrepencies to sort out is this: we are in the middle of the Bush boom - where whatever rise in real employment is going to happen is happening now. The headline number is 229,000 total private employment - confirming the rise in oil prices - namely, that the economy is slowly overheating. It is one of the best numbers of Bush's tenure in office and will be heralded as a sign of coming good economic times.

This is the wrong way to look at it.

What's really going on

The correct interpretation is that the economy is at equilibrium, and that rises in employment are bought by increased material prices. We aren't seeing a rise in real productivity, but the effects of falling wages and easy money.

What this means is that the continued accomodative stance of the fed - the are having to work their way to get down to neutral from accomodative- is driving a push of hiring. Where the jobs came from is equally interesting: most of the good producing jobs were in construction, 30K of 55K added. This says that the American economy this cycle is going through the same private residence construction boom that South Korea took to dig its way out of its post-financial crisis bust in the late 1990's and which England took starting in 1999.

This wave of private construction is, by definition, a finite cycle. It produces goods that will be in use for 30 to 50 years. One can get one of them in a generation. That borrowed money is driving the rest of the economy. As people drive farther to get to bigger homes farther from their jobs, and as building - which has not gotten more energy dense per GDP as fast as the rest of the economy - they burn more oil. Oil prices rise, and gasoline with it.

There are, and are going to be, thousands of partisan ways to spin this, but the raw fact: of a US private residence boom funded by borrowed money, should not be in doubt. The current US fiscal and monetary policy is to continue this war economy without war austerity boom. The short term outlook is then for more hiring and more increases in material prices.

This is confirmed by the recent drops in the household survey: people are taking second jobs, and moving from "self-employment" back to payroll employment.

That the deflationary forces globally - industrialization of China and other exporting economies trying to stay even with China on price - are still dominant is shown by the failure of energy inflation to create consumer inflation. Indeed these forces are slightly ahead of inflationary forces. The way to see this is the low CPI growth and the rise in the unemployment rate. What this means is not that the labor market got worse, but that we are farther from the theoretical maximum growth rate of the economy - at least short term - than we were before.

To repeat what people have not yet been told often enough: as it is now constructed the Unemployment rate is not the labor market, but the amount of slack before consumer inflation re-asserts itself. It is a number that tells the Fed where to set interest rates, not a number which is a proxy for how good the labor market is. The unemployment rate has told a consistent picture over the last year: namely that the economy is at the verge of inflation, but not quite at the point of producing consumer inflation.

Let me repeat that the American Unemployment Rate number is accurate, but it is not measuring what people think it is measuring. It is measuring how close we are to NAIRU - the highest rate of employment that this economy can sustain without inflation, not "labor capacity utilization". This is why there is tremendous slack in the job market, and why real wages are falling. It is also why monetary policy is torn in two directions: the inflation fighters want much higher interest rates, because the economy is uncomfortably close to inflation, the underemployment fighters want low interest rates, because there is tremendous underutilization of America's work force - this can be seen from the flat "hours worked" numbers near the bottom, and from the flat nominal weekly earnings at the very bottom.

The gamble from the current executive - which should be counted as controlling both fiscal and monetary policy - is to ratchet up inflationary pressures slowly enough so that they don't boil over, by printing far too much money, and hoping that other nations will sink enough of that money. This will allow the best possible growth without inflation. On a historical basis, this is terrible job growth, but as long as there is no political revolt, it can be sustained.

That the work force is increasingly restive is shown by the sinking popularity numbers for Bush, see this graph from the indespensible pollkatz. Americans have bet big on a boom to pay off their speculation in housing. If they don't get it, they will be very unhappy.


The Really Big Picture - 12 Credit Course

The two factors making this work are as follows: first China is an engine of deflation, driving down the costs of consumer goods and holding wages in line globally. The US filled the same role in the 1920's that China is now. Second, the continued willingness of other nations to export to the US, and then invest the profits in the US. This is what is causing such economic pain in Europe - while, in any open economy model investment should be moving to Europe - where real risk free returns are much higher than in the US, instead, money continues to flow to the US. The UK in the 1900-1930 period filled the same role: the global haven for safe money. As the US loaned money that flowed into investments in the UK, propping up their economy in the first third of the 20th century, so China and the other manufacturing powers are doing so now. Eventually this generated enough economic instability, nationalist jealousy and impulse towards totalitarian states, as peoples sought to control basic scarcity in order to direct economic growth towards them rather than the core nation, to lead to a series of global conflicts. Let us hope that the present repetition of that pattern has a less violent outcome.

This is why currency worries continue - at what point do other nations end their willingess to lend to the US? And why the cycle continues even in the absence of new kinds of economic supply: others loan money to the US, because they need to prop up their past holdings in the US. It is also a self-sustaining cycle in the short term. More houses mean both more consumer credit, as long as the housing bubble is sustained, and more demand for consumer goods to fill those houses, as well as more demand for larger vehicles to make the commute and "shoe leather" costs of shopping and mobility more bearable.

But the source of this fuel is the ability of the US government to borrow huge sums of money to fund it, and these sources are about tapped out. Bush is going to be more conciliatory towards the outside, because his attempt to borrow against Social Security - which is what his SS plan was - has been stopped. He needs another year.

At the end of that year, there will be a downturn, and, using this as a crisis argument, he can force through Social Security dissolution as part of the economic package to "meet the emergency".

All this from one jobs number? No. But instead from the very consistent linkage between oil prices and inflation. All of the hiring in the US economy for the last 2 years has been Phillips Effect hiring - hiring to fill inflationary driven demand.

Since China is going to remain an engine of deflation for the next generation, and the US is the only power that can protect oil supplies, it might seem that this cycle is sustainable, with minor down turns, for a long time.

However, this is not the case, as the recent numbers show. While 229K private employment might seem good, that is merely because we have had 4 years of job losses or terrible job growth. It is slightly above the average for the 8 years of Clinton's tenure. The job growth required to sustain the construction boom is not there, and there are no major new supplies of oil coming on line in the next decade.


We are dancing on a volcano

In short - again - payroll growth is mirrored by inflationary pressures, and the question for the American central bank, the Federal Reserve, is how much longer this can go on. Indications are that time is running out before real inflationary pressures - stagflation - take hold, or, conversely, that the rise in housing prices and flat real wages force an end of people's ability to borrow to buy housing.

How long will this take? Current indicators are that this is the boom, that last summer was the "soft landing" and that therefore we can expect 9-18 months of "boom like" growth, relative to the rest of this business cycle. That the longer this goes on, the larger the drop will be on the otherside, and the more structural inflation will be built in. In nominal terms, oil has risen 500% since its cyclical low in 1999. Even after the coming recession, it is difficult to see any model that drives it to less than 35 dollars a barrel, or a increase of 300% trough to trough.

Once again - the continued pattern of materials inflation matching payroll growth is still in place, the deflationary pressures from China are continuing to keep a lid on real wages, and the growth in the American economy continues to be from protected industries - particularly housing construction - rather than export growth.

Talking Points

  1. Look ma, George got a C+! This number is not good - it is about what Clinton averaged in 8 years. And this is Bush's boom.
  2. Momentum, schmoementum. This isn't the rebound from the 2001 recession, it is the boom before the bust. There is no sign of new economic activity, merely the effects of borrowing. Uncle Alan knows this, that is why he is proposing a national sales tax.
  3. I care about my job, not Alan's job... And real wages are down. The unemployment rate tells us no more about the job market than the Dow Jones Industrials does. It tells Alan how much slack he has to play with, not how much chance you have to get a raise, a new job or a better job. If this economy is so good, where are the raises?
  4. This is a boom that feels like a bust. The job market is not good, especially for a boom: real wages are down, labor force participation is still well below peak, and job growth is still debt driven.
  5. We can't export houses to balance our trade deficit. When most of the good producing jobs growth is in construction...

Originally posted to Stirling Newberry on Fri Mar 04, 2005 at 06:27 AM PST.

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