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 lost 4000 payroll jobs in August, after posting a 68,000 gain in July. Economist expected a 110,000 gain in August and were clearly taken off guard by the sudden drop in hiring.
 
The grip of the subprime mortgage crisis is apparent, as jobs growth has slowed to much less than half its second quarter 139,000 monthly pace. The risk of recession has increased to 50 percent.
 
Residential construction, mortgage lenders, real estate, and manufacturing displayed weakness, indicating growth is slowing significantly in the third quarter and raising prospects for an interest rate cut at the September 18 meeting of the Federal Reserve Open Market Committee. 
 
Wages increased a moderate 5 cents per hour, or 0.3 percent. Moderate wage and labor productivity growth should help keep core inflation in check, and this should help abate Federal Reserve concerns about core inflation as it navigates the fallout from the subprime crisis.

Overall, the pace of employment growth indicates the economy is expanding much more slowly than the 4.0 percent annual GDP growth posted in the first quarter. Third quarter growth should be about 2.0 percent, though the downside risks for that forecast are ominous.
 
The unemployment rate was steady at 4.6 percent in August. However, these numbers belie more fundamental weakness in the job market. Many more adults are sitting on the sidelines, neither working nor looking for work, than when George Bush took the helm. Factoring in discouraged workers raises the unemployment rate to about to 6.7 percent. 
 
The stock market came through the subprime crisis reasonably well. It actually gained in August, despite wide fluctuation as investors alternated between fear and euphoria with news about the woes of mortgage lenders and hedge funds. If the economy avoids recession, profits from overseas operations and increased foreign demand for U.S. equities will sustain stock prices.
 
Unemployment at 4.6 Percent Belies Structural Weaknesses
 
The household survey of employment, which includes the self employed, shows the unemployment rate at 4.6 percent in August, the same as in July. More importantly, the survey indicates another 592,000 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 6.7 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 the fact that many adults choose to sit on the sidelines, though it contributes importantly to lackluster GDP growth in 2007, 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 fell by 22,000 in August after falling 14,000 in July. Housing continues to flag, though prospects appear somewhat better for commercial construction. Most of the new job opportunities will be in government infrastructure, commercial projects and industrial facilities, where tightening capacity should ignite activity. Tightening state and local budgets, caused by falling property values, remains a worry for public infrastructure projects.
 
Durable goods manufacturing lost 30,000 jobs, owing to the auto industry’s woes and broader from Asian imports, benefiting from undervalued currencies and other subsidies, limits employment. 
 
In August, manufacturing lost 46,000 jobs, and over the last 89 months, manufacturing has shed more than 3.3 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.
 
The dollar remains too strong against Chinese yuan, Japanese yen and other Asian currencies. The Chinese government artificially suppresses the value of the yuan to gain competitive advantage, and the yuan sets the pattern for other Asian currencies. These currencies are critical to reducing the reducing the non-oil U.S. trade deficit, and instigating a recovery in U.S. employment in manufacturing and technology-intensive services that compete in trade.
 
Outlook for GDP Growth and Stock Prices
 
In 2007, average GDP growth will be in the range of 1.7 to 2.2 percent. Without more tangible steps to reduce the trade deficit and shore up the housing sector, growth will not recover to more than 3 percent in 2008. Nevertheless, the outlook for stocks looks bright.
 
The stock market came through the subprime crisis reasonably well. Despite wide fluctuations, the Dow Jones average rose 146 points in August after falling 197 points in July. As of September 6, the Dow Jones was up 151 points from July 31, and 2287 points from its August 2006 low. 
 
Global economic uncertainty, instigated by the meltdown in U.S. subprime mortgage lending and panic sell offs of hedge fund assets, is driving investors around the globe into short-term U.S. Treasury securities and U.S. equities.
 
With U.S. companies earning large profits from robust growth in Asia and uncertainty in credit markets driving foreign money into U.S. stocks, steady or falling U.S. interest rates should help sustain stock prices, though investors may expect wide day to day fluctuations.

Peter Morici,

Professor,