Two good jobs reports back to back has got the Obama campaign trying out some new campaign rhetoric about how what they’ve done has worked and that America is “back”.
Is it? Or is it premature to make that claim? Well, on the one side, most economists will tell you that job growth is usually a lagging indicator and good job growth usually means the other underlying numbers for positive growth are good too.
But are they?
Well, not necessarily. In fact, one of the other leading indicators of a strong economy, GDP growth, isn’t going to be so hot according to many economists. David Leonhardt reports:
But the jobs report isn’t the only measure of economic activity, and another major measure — of gross domestic product — doesn’t look quite so cheerful. The most likely situation is that job growth will slow in coming months, economists say, which will make President Obama’s economic narrative a bit more complicated than it now is.
On Friday, Macroeconomic Advisers, one of the most closely watched forecasting firms, reduced its estimate of economic growth in the current quarter to an annual rate of 1.8 percent, from 2 percent. And 1.8 percent growth does not generally lead to very strong job growth. In the fourth quarter of last year, by comparison, the economy grew 3 percent.
Beyond the current quarter, forecasters expect the economy will grow at an annual rate of 2 to 2.5 percent for the rest of the year, according to Bloomberg.
Based solely on the gross domestic product numbers, the obvious conclusion is that job growth will slow in coming months. Over the last six months, the average monthly gain in nonfarm employment has been 201,000; over the last three months, the average gain has been 245,000.
Sure enough, most forecasters do expect job growth to slow. Barclays Capital expects 200,000 jobs a month for the rest of the year. IHS Global Insight forecasts a slowdown to 180,000 jobs a month. Macroeconomic Advisers says it will slow to 140,000 jobs a month in the final three quarters of this year.
So what’s the drag on the GDP? What is it that is causing this less than optimistic forecast for job growth?
A combination of things:
Why do economists expect growth to slow? The warm winter has probably pulled some spending forward into the last few months and will reduce spending in coming months, says Joshua Shapiro, an economist at MFR Inc. in New York. Rising oil prices also play a role. So does the continuing debt overhang, which makes a sustained recovery difficult.
Spending slowdowns, rising oil prices and the debt overhang all combine to slow growth. Of course there are other things too that will effect it – increased regulation, for instance.
Annie Lowrey reports on other concerns:
First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.
The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.
“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.
Inventories have been restocked and oh yeah, there’s the European sovereign debt crisis to contend with. As well as:
Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.
And finally we have the Chairman of the Federal Reserve:
He acknowledged that rising oil prices were “likely to push up inflation temporarily while reducing consumers’ purchasing power.” But the Fed expects the overall pace of increases in prices and wages to remain “subdued,” Mr. Bernanke said …
Bernanke also mentioned the continued depression of the housing market as a factor and he believes growth this year will be between 2.2 to 2.7 percent. Such growth would indeed put a damper on employment growth.
Whether or not the forecasts will prove true obviously remains to be seen. However the elements that should slow growth seem to be in place. Consequently, the forecasts are less optimistic than Obama’s political campaign would have you believe.
After many “false dawns” (remember “green shoots”?) the possibility of another one looms large. Sure, the economy is making progress. And yes, that’s good. But overhyping that progress and then seeing the numbers go south again could be very damaging to an incumbent president’s reelection hopes. Not that I expect that possibility to slow him down a bit from claiming to have saved the country from the abyss when in fact we’re simply crawling out from the one he helped create.