Hardly Breaking News

That the US jobs report last Friday showed continuing weakness in the labour market is certainly by now far from breaking news. I wouldn’t however want to let it pass by without comment. I think it is now abundantly clear that there is a pattern in all this somewhere (what that pattern is precisely, and what is causing it may be another matter). The US is not creating the quantity of new employment it needs. This means that the output gap (the gap between potential and actual output) is unlikely to reduce, and that the Fed will in all probability be unable to raise interest rates as vigourously as it had anticipated. This is also likely produce downward pressure on the dollar (with a consequent upward pressure on the Euro) and all sorts of other weird and wonderful things which should preoccupy those given to thinking about these matters. I think the debate is effectively over though: this is more than just a ‘soft spot’.

Employers’ payrolls grew by just 96,000 in September in a weaker-than-expected government report that provided a final snapshot before Election Day of a lackluster jobs market.

Friday’s Labor Department report means President Bush will face the electorate with 821,000 fewer jobs in the country than when he took office, though 1.78 million jobs have been added in the past year.
Source: Yahoo News

That continuing labour market weakness in the US will be ‘dollar weakening’ is more or less generally agreed. That the upshot of this would be a stronger euro (the single currency has been nudging up slowly in recent weeks) may seem surprising (given that on many measures the eurozone economy is currently underperforming the US one) but it is in fact a direct structural consequence of the monetary arrangements we presently have.

Some are going somewhat further than suggesting a mere weakening of the dollar as a possibility. The alarm shot was given by Dalls Federal Reserve President Robert McTeer when he declared in a speech in New York last week that whilst overseas investors now “finance” the US current account gap, “theoretically some day that process will come to an end, the flows will turn against us and there will be a crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar.” This prospect, which currently seems remote, should not be taken lightly. It is real, and it is there. And obviously any rapidly depreciating dollar would bring a rapidly appreciating euro in its wake (at least initially, after that all bets would effectively be off).

So rather than gloating at what might well be seen as an electoral difficulty facing one GW Bush, our financial and political leaders would be better occupied in considering what, if and when this happens, our exit strategy might be.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

7 thoughts on “Hardly Breaking News

  1. Can we not gloat for at least three weeks?

    On the other hand, proclamations about the unsustainability of the various US deficits have been around for as long as I have been paying attention, probably much longer. What would be helpful is an idea of why now is different.

  2. I work in Communications,

    Though we see a shortage of employment for about the next four years, after that, the employment picture picks up dramatically.

    This is largely due to the so-called “baby-boomers” beginning to retire.

    By 2020, there will be such a shortage of labor, new immigration laws will have to be passed.


    I believe that Europe will actually precede the US in this area. The US can draw upon latin america for the largest amount of new labor, while Europe is in a different predicament… if you know what I mean.

  3. An interesting hypothesis about the lack of job creation comes from The Economist. They suggest that super-low interest rates might have spurred spurred buisnesses to borrow to buy productivity-enhancing capital goods rather than hire new workers.


  4. Overall US unemployment is at 5.8% of thereabouts. It wasn’t an issue in the debates either. Fact is, most Americans are employed. And most American small business are efficient and productive.

    I was listening to the Diane Rehm show’s Friday news roundup the morning the jobs report came out and one woman called in and actually complained that her husband, who used to make $300,000 a year working for a ‘corporation’ now only made $50,000 and boy was she pissed. She of course blamed it all on George Bush. Cry me a river.

  5. “What would be helpful is an idea of why now is different.”

    Basically, at present it isn’t. But I think we should all be aware that this can’t continue indefinitely. McTeer’s worry isn’t for tomorrow.But one day there will be a ‘tipping point’. If the US fails to grow sufficiently strongly to absorb all the new labour market entrants this will be mildly deflationary and dollar negative. At some point the market participants could anticipate a major correction, and effectively bring it about by acting on their anticipation. This is the potential problem.

    Some European states have something similar with their fiscal situation (I am thinking especially of Italy here) if the perception ever arises that they may not be realistically able to pay it all back, and if other states appear unwilling, or unable, to bail them out. But this is another story.

    “By 2020, there will be such a shortage of labor, new immigration laws will have to be passed.”

    I agree with your sentiments entirely, but a lot of water is going to go under the bridge between now and 2020.

    Also we should all be aware that nation states don’t remain net suppliers of migrants indefinitely. Again there will be a turning point as the demographic transition becomes increasingly universal in its consequences.

    Really I think we would do well to focus our attention on what is going to happen between now and, say, 2010.

    “They suggest that super-low interest rates might have spurred spurred buisnesses to borrow to buy productivity-enhancing capital goods rather than hire new workers.”

    This could be a factor. Obviously there is no perfect solution here. You need the low interest rates to maintain momentum, but clearly there are other consequences.

    In general though I suspect that many of the most important ‘productivity enhancing’ elements are coming from astute leveraging of outsourcing. The problem stems not so much from the outsourcing itself but from the lack of new business investment opportunities inside the US. Most of the growth seems to be coming from construction and domestic consumption (much of which involves imports). In fact there seems to be a widely accepted view that companies have a lot of cash but fewer ideas about what to do with it. One symptom of this are the large scale share ‘buy backs’ which have been going on.

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