Peter Morici is an economist and professor at the Robert H. Smith School of Business at the University of Maryland. He is a recognized expert on international economics, industrial policy and macroeconomics. Prior to joining the university, he served as director of the Office of Economics at the US International Trade Commission.

Today, the US Labor Department reported the economy added 132,000 payroll jobs in June, down from 190,000 in May.

Wages increased a moderate 6 cents per hour, or 0.3 percent, despite surging energy and food prices. Moderate wage and labor productivity growth should help keep core inflation in check, but rising gasoline prices later this summer and pressure from the ethanol program on grain and food prices could yet ignite a wage-price spiral. The Federal Reserve will remain cautious about inflation.

In the second quarter, the economy added 440,000 new payroll jobs. Overall, the pace of employment growth indicates the economy is expanding much more rapidly than the 0.7 percent annual GDP growth posted in the first quarter. Second quarter growth should be about 2.5 percent or a bit higher. For the year, GDP should be up 2 to 2.3 percent.

This is hardly a stellar performance. Thanks to a dollar overvalued against the Chinese yuan, Japanese yen, and other Asian currencies, the economy continues to underperform its potential to grow about 3.5 percent per year. Sub par growth is reflected in the poorer quality and number of jobs created for workers outside the high flying health care, technology and finance sectors.

Nevertheless, with energy and food prices posing the threat to ignite inflation throughout the economy, the Federal Reserve is in no position to lower interest rates. Look for steady interest rates through the September meeting of the Open Market Committee.

These jobs growth numbers will be good for stock prices. With U.S. companies earning large profits abroad and private equity buyouts driving up demand and unlocking value for U.S. stocks, moderate growth and steady interest rates create a great incubator for the bull market. The bull market will continue, and the Dow should breach 14,000 before the end of 2008.

The economy of George W. Bush will continue to proceed with contradictions. The job market is great for highly skilled professionals and their stock holdings will continue to soar. Meanwhile, ordinary working Americans continue to bear the greatest burdens of globalization—wages that lag inflation and a lousy job market.

It’s caviar for the best and cake for the rest. President Bush’s job approval rating at 27 percent closely coincides with the proportion of Americans doing well in his economy.

Unemployment at 4.5 Percent Belies Structural Weaknesses

The household survey of employment, which includes the self employed, shows the unemployment rate at 4.5 percent in June, the same as in May. More importantly, the survey indicates another 77,000 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 6.1 percent.

Low wages are discouraging many adults, who prefer to draw down assets or rely on incomes of spouses rather than accept substandard employment at poor wages and with few benefits. The unemployment statistics do not reflect this reality, though it is importantly responsible for lackluster GDP growth, terrible U.S. savings performance, Americans borrowing from foreigners at a pace of $50 billion per month, and a U.S. debt to foreigners now topping $6 trillion.

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. For those workers, who compose about half the working population, the quality of jobs continues to spiral downward.

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.

Construction employment rose by 12,000 in June but was down by 10,000 in the second quarter. Housing continues to flag, though prospects are better for commercial construction. Most of the new job opportunities will be in government infrastructure, commercial projects and industrial facilities, where tightening capacity is igniting additional activity.

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

In June, manufacturing lost 18,000 jobs, and over the last 87 months, manufacturing has shed more than 3.2 million jobs. Were the trade deficit cut in half, manufacturing would recoup about 2 million of those jobs, U.S. growth would exceed 3.5 percent a year, household savings performance would improve, and borrowing from foreigners would decline.

Over the past 15 months, the dollar has weakened against the euro; however, against the important Chinese yuan, Japanese yen and other Asian currencies, the dollar remains too high. 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 and technology-intensive services that compete in trade.

The chronic trade deficit shifts workers from higher valued jobs in manufacturing and exportable services into lower valued services that do not compete in trade, such as the restaurant and lodging industries. This lowers U.S. productivity and wages, and slows growth. Overall, it is responsible for the poor job market faced by many workers without a college education or specialized skills.

The recent failure of the Strategic Economic Dialogue with China to obtain meaningful results indicates, unless Washington pursues a new trade strategy, U.S. manufacturers will continue to compete against massively subsidized Asian products, the economy will continue to limp along at less than its potential, and many workers will continue to face a lousy job market.

Outlook for GDP Growth and Stock Prices

In 2007, GDP will be in the range of 2 to 2.3 percent, without tangible steps to reduce the trade deficit or lower interest rates.

Slow growth results not from economic fundamentals but from conscious policy choices at Treasury and Federal Reserve. Treasury’s inability to manage the international value of the dollar and its ideological opposition to other steps to reduce the trade deficit slow U.S. employment and productivity growth. This leaves the Federal Reserve beset by only moderate growth and the potential for higher inflation, and disinclined to either raise or lower interest rates. Look for the Federal Reserve to stand on the sidelines through September. As the subprime crisis recedes, the long end of the yield curve will stabilize, and investors will focus more on fundamentals than the recent indiscretions of fund managers and senior management at places like Bear Stearns.

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 corporate bottom lines and attracts foreign investors. U.S. stocks are particularly attractive to Europeans and Japanese investors who sit on strong euros, pounds and yen but have fewer good investment options at home.

With opportunities to expand U.S. operations limited, many U.S. companies will continue to buy back shares, and private equity funds will continue reorganize U.S. publicly traded companies. The recent problems posed by subprime mortgages will prove a hiccup, because the fundamentals underlying private deals that reorganize good corporate assets handicapped by lethargic management remain compelling.

Much the same can be said about recent subprime failures and the fundamentals of the housing market. The national median price of existing homes sold has each month has risen since January. Don’t look for a panic in the housing market to derail the economy or slow the stock market.

Meanwhile the commercial real estate market is robust, as witnessed by recent sale prices for marquee properties and booming nonresidential construction.

Strong profits from Asia, a stabilizing real estate scene, and new private-equity deals will continue to boost demand and prices for stocks.

Surging corporate profits, moderate growth and steady interest rates at home, and robust demand for equities from corporate buybacks, private equity, and foreign investors should power up U.S. stock prices. The bull market will continue, and the Dow should breach 14,000 before the end of 2008. 

Peter Morici,

Professor,

703 618 4338 Cell Phone

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm