Falling unemployment still leaves US with plenty of other problems
Joblessness is down in the US. Is it time for a toast, or do we drown our sorrows over the other problems the economy still has?
Perception is everything. To one person, a glass may be half full, but another will see it as half empty. So should President Barack Obama be dancing over the moon at February's US employment report, which saw the headline unemployment figure drop to 7.7 per cent? Or should he be desperately worried about the cartload of other economic problems the US faces?
Even if you just look at the unemployment figures, it is very much a case of a glass half full. True, the net gain in new jobs was 236,000 and the headline rate fell from 7.9 per cent, both better than expected numbers: "unambiguously positive" was the consensus verdict.
The stock market danced to a record high, and the Dow Jones Industrial Average closed the week at 14,397.07 (though in inflation-adjusted terms the Dow would have to top 15,732 to be at record levels).
But even on this score, it has been a long, hard slog. When Obama was sworn in as president in January 2009, unemployment was 7.8 per cent, so the US has just got back to where it was before Obama took office.
A closer look at the figures also shows that last month the number of multiple jobholders rose by 340,000 to 7.26 million, meaning that all of the new jobs went to people who already hold a job. The number of people unemployed for six months or more rose to 4.8 million, up by 89,000, and the average duration of unemployment went up to 39.6 weeks from 35.3 weeks.
Economists disagree whether the February improvement presages the advent of spring, with investment bank economists tending to be more optimistic. Felix Salmon, a blogger for Reuters, points out that "both the employment to population ratio and the labour force participation rate are much lower than they ought to be. If this is a recovery, the former in particular ought to be going up".
The employment to population ratio is dawdling below 59 per cent, and the participation rate is just above 63 per cent. As Salmon pertinently notes, "there are 89.3 million Americans who are not in the labour force, of whom just 6.8 million currently want a job. The economy ought to be able to find good, rewarding jobs not only for the 6.8 million, but for a large chunk of the other 82.5 million as well. Just imagine what that would do for our tax revenues: all of our fiscal problems would be solved at a stroke!"
A lot will depend on whether Obama can blow away the fog of disagreement with congress over taxation and government spending. The painful process of sequestration has started, under which the government must cut US$85 billion from its spending.
If you believe that manufacturing is an economy's lifeblood, then the US is well on the way to losing it, and the February employment figures do not help much. Back in 1945, the US had 15.7 million manufacturing jobs or 37.4 per cent of all non-farm jobs. Since then there has been a steady decline, to 30.4 per cent in the 1950s, 23 per cent in the 1970s, 18.5 per cent in the 1980s, 14.8 per cent in the 1990s, 10.9 per cent in the 2000s and 8.9 per cent now.
While the US stock market has soared to new (nominal) records, ordinary Americans have not fared as well. Real median US household income - that is, real meaning inflation adjusted - was US$50,054 in 2011, 8 per cent lower than the 2007 peak of US$54,489.
US employee compensation as a percentage of GDP has also been declining, from a high of almost 54 per cent in the late 1960s to below 44 per cent today. Several studies have shown that the recent benefits of US growth have gone not merely to the top 1 per cent or the top 0.1 per cent but to the 0.01 per cent - who do not seem to be producing the jobs that the Republicans promised.
Meanwhile, across the Atlantic in Europe, everyone knows that Italy is in a mess. The election gave no party a clear majority. The rise of comedian Beppe Grillo and his Five Star Movement, who won 25 per cent of the vote, and the continued popularity of Silvio Berlusconi, who captured almost 30 per cent of the vote, allowed The Economist to enjoy itself with a headline declaring: "Send in the clowns".
Few people can have been surprised when Fitch cut Italy's credit rating to BBB-plus with negative outlook. Standard & Poor's, with a BBB-plus and Moody's with Baa2 have already marked Italy down, given that government debt is 127 per cent of gross domestic product and the outlook is uncertain after the "sensible party" of Mario Monti won only 10 per cent of the vote.
But maybe the glass that Italians enjoy - as opposed to Italy's glass - is two thirds full. There is a study done by central banks into household income, which seems to show that Italians are not so badly off after all.
Surveys went out in 2010 to collect "micro-level structural information" on household wealth. Wolf Richter, a San Francisco entrepreneur and author, has been following the published and unpublished results and reports that "the results are so explosive that the Bundesbank is keeping its report secret - and word has leaked out why".
Austria published its report, showing that the wealthiest 5 per cent owned nearly half of the country's wealth with median wealth of €1.7 million (HK$17.2 million) in diversified assets. But the lower 50 per cent owned only 4 per cent of the country's wealth.
Germany's report is likely to be similar, speculates Richter. Last year Germany's labour ministry sent a massive 535-page report on poverty and wealth, which showed that by 2008 the lower 50 per cent of Germans owned only 1 per cent of the country's private wealth, down from 4 per cent 10 years earlier. But the top 10 per cent had increased their share to 53 per cent.
But Italy is another story. The Italian report shows that median household net wealth has increased by 56 per cent since 1991, and it increased by 5 per cent annually between crisis-hit 2008 and 2010. Italy's median household wealth is €163,875. Germany's median household wealth is likely to be closer to the €76,000 in Austria (where the average was €265,000).
The lesson is that it is painful to pay taxes and live within your means. You can be sure that Berlin does not want to help top up the Italian glass by bailing out the Italian government that Italians have refused to support by paying their taxes. Cheers!