James Pethokoukis

Using a handy graphic found in Mitt Romney’s economic plan, I’ve updated the Bernstein-Romer jobs chart from 2009 while also incorporating (in green) Wall Street bank forecasts (Goldman Sachs, JPMorgan) of where the unemployment rate might be headed.

Two things jump out at me: First, of course, is the incredible underperformance of the $800 billion stimulus. Second, note where the Obama White House thought the unemployment rate would be in 2012  even if no stimulus: around 6 percent or so. Reminds me of how dismissive Obama’s economic advisers were in 2009 and 2010 of the thesis that downturns after financial crises can be nasty beasts. Maybe if they had taken the situation more seriously, they would have focused more on growth and jobs (and deep, permanent tax cuts) instead of healthcare and cap-and-trade.

All kinds of numbers have been flying around comparing President Barack Obama’s jobs record vs. Gov. Rick Perry’s. The employment number most people know is the unemployment rate. The most recent state numbers, through June, put the Texas unemployment rate at 8.2 percent. The national unemployment rate that month was 9.2 percent, worse but not dramatically so.  But that is the U-3 rate, and it does not include discouraged workers. Here is how the Labor Department describes things:

Discouraged workers (U-4, U-5, and U-6 measures) are persons who are not in the labor force, want and are available for work, and had looked for a job sometime in the prior 12 months. They are not counted as unemployed because they had not searched for work in the prior 4 weeks, for the specific reason that they believed no jobs were available for them.

Because those sorts of folks are excluding from the U-3 measure, the labor force participation rate has been falling as has the official size of the U.S. labor force.  The rate was 63.9 percent in July and 64.1 percent in June, down from 65.7 percent in January of 2009. The Texas labor force participation rate was 65.6 percent in June, higher than the national average. That means there were more folks active seeking work, a reflection of the more positive job environment.

Bottom line: So let’s do an apples-apples comparison. What if the national labor force participation rate was as high as that in Texas? Well, the national U-3 unemployment rate would have been 11.3 percent in June, sharply higher than the 8.2 percent rate in Texas. And what if the Texas labor force participation rate had been as low as the national rate? Under that scenario, the Texas unemployment rate would have been 6.1 percent, also dramatically better. So either way you cut, the unemployment rate is much better in Texas than the national average. Score one for Rick Perry.

For a more wide-ranging analysis, please check out this post at Political Math.

After looking at today’s anemic unemployment report, Goldman Sachs drops this H-bomb on the Obama campaign:

We have lowered our forecast for US real GDP growth further and now expect real GDP to grow just 2%-2½% through the end of 2012.  Our forecast for annual average GDP growth has fallen to 1.7% in 2011 (from 1.8%) and to 2.1% in 2012 (from 3.0%).  Since this pace is slightly below the US economy’s potential, we now expect the unemployment rate to be at 9¼% by the end of 2012, slightly above the current level.

2. Even our new forecast is subject to meaningful downside risk.  We now see a one-in-three risk of renewed recession, mostly concentrated in the next 6-9 months.  There are three specific issues that concern us.  First, a worsening of the European financial crisis, and a failure of European policymakers to respond adequately, could lead to a further tightening of financial conditions and credit availability, which would worsen the economic outlook globally.  Second, our forecast assumes that the payroll tax cut—currently scheduled to expire at the end of 2011—is extended for another year, but if that failed to happen the fiscal drag in early 2012 would increase significantly.  Third, increases in the US unemployment rate have historically had a tendency to feed on themselves, and this could happen again.

The consensus used to be that President Obama might be OK if the jobless rate fell below 8 percent by Election Day.  That seems increasingly unlikely. The economy is, at best, in slow-growth mode, just churning and churning, creating few jobs.  Comparisons to President Reagan’s 1984 “Morning in America” campaign are looking ever-more ridiculous.  Under Reagan’s tax-cut driven recovery, unemployment fell from 10.8 percent in December 1982 to 7.2 percent by Election Day as the economy grew 4.5 percent in 1983 and 7.2 percent in 1984. In fact,  Jimmy Carter’s 1980 campaign might be the better comparison. The unemployment rate jumped from 6.0 percent in December 1979 to 7.5 percent on Election Day 1980 as the economy shrank 0.3 percent.

The official U.S. unemployment rate is 9.2 percent. But what if that rate was adjusted just for all the discouraged folks who’ve dropped out of the labor force during the past few years? It would be over 11 percent. (And over 16 percent if you counted the underemployed.) This chart from JPMorgan makes the point:

When economists are expecting 100,000 or so net new jobs, and the Labor Department reports measly gains of just 18,000 (plus an increase in the unemployment rate to 9.2 percent), the reaction sounds like this:

– “All in all, an employment report with no redeeming features whatsoever – employment, unemployment, hours and wages all disappointed.”- Barclays

–  ”The June jobs report was a shocker. It was far worse than expected, and weak on all key dimensions – job creation, unemployment, the length of the workweek, and hourly earnings. The recent pattern of jobs suggests that the economy hit a brick wall in May.” — IHS Global

– “Overall the June Employment Report was quite disappointing, with basically no positive offsets to the poor headline results.” — Goldman Sachs

–  ”The June employment report was universally weak and undoes the modest improvement in the economic data we have seen over the last two weeks. We are back where we started; the risk of a cold summer, similar to last year, is palpable.” — BofA Merrill Lynch

–  ”It is hard to excuse this report on supply-chain disruptions and it suggests that growth momentum evaporated as the second quarter drew to a close.”- RDQ Economics

–  ”Unfortunately, leading labor market indicators like temporary help employment, aggregate hours worked and first-time jobless claims remain weak and thus do not suggest an imminent reacceleration in the labor market.” — MKM Partners

Indeed, if the labor force, which shrank again, was as big as it was when President Obama took office, the unemployment rate would be north of 11 percent. As it is, the broader U-6 measure surged to 16.2 percent from 15.8 percent. But with an economy growing at just 2 percent or so, expectations should be low.  If the economy picks up in the second half, so should job growth.

But we have a long way to go before getting the unemployment even back to 8 percent or so by Election Day 2012, needing some 255,00 jobs a month. Obama’s political team seems to think the unemployment rate does not matter. We shall see. At his new conference today, Obama offered plenty of excuses, including blaming uncertainty over the debt ceiling:

We’ve always known that we’d have ups and downs on our way back from this recession. And over the past few months, the economy has experienced some tough headwinds — from natural disasters, to spikes in gas prices, to state and local budget cuts that have cost tens of thousands of cops and firefighters and teachers their jobs. The problems in Greece and in Europe, along with uncertainty over whether the debt limit here in the United States will be raised, have also made businesses hesitant to invest more aggressively. The economic challenges that we face weren’t created overnight, and they’re not going to be solved overnight.

Hardly the stuff for a soul-stirring campaign ad. A few other observations:

1) Will Obama now make a renewed push for a payroll tax cut extension to be part of the debt ceiling negotiations?

2) Will Tim Geithner leave sooner rather later to be replaced by someone with a job-creation background like GE’s Immelt or Facebook’s Sandberg?

3) Will Rs dig in even further against raising taxes?

4) Will Obama’s approval numbers fall below the plateau they’ve sort of been stuck on (not counting the OBL  bounce.)

5) Will the weak economy nudge another GOPer to get into the 2012?

This chart from the Heritage Foundation kind of says it all:

A neat chart from the Council on Foreign Relations:

And the explanation. At least one of them:

The shape of U.S. labor market declines and recoveries—as measured by the current level of employment relative to the prior peak—has changed dramatically over the past two decades. From the 1940s through the 1970s, they exhibited a V-shape of sharp declines and rapid recoveries, as seen in the chart above. By the 1990s they took on a U-shape, signifying longer, persistent unemployment.

“During times like the 1950s and 1960s, a rising level of educational attainment kept up with this rising demand for skill,” MIT economist David Autor writes, “but since the late 1970s and early 1980s, the rise in U.S. education levels has not kept up with the rising demand for skilled workers.”

The labor demand differential is particularly stark today: unemployment among the college-educated stands at 4.5%, compared with 14.7% for those without high school degrees. Unemployment compensation, the main tool in the U.S. arsenal to address joblessness, was created back in 1935 to buffer relatively short stints of unemployment, but the need today continuously to extend benefits is a sign that policy has got to address the skills mismatch far more effectively.

The main reason the unemployment rate is so high is that the recession was so deep and the economic “recovery” is so anemic. But part of the problem may be a mismatch between job opening and the skills of unemployed workers. Here is WaPo’s Robert Samuelson:

Economist Harry Holzer of Georgetown University thinks the unemployment rate might be closer to 8 percent than today’s 9.1 percent if most of these jobs were filled. That implies up to 1.5 million more jobs. Economist Prakash Loungani of the International Monetary Fund estimates that 25 percent of unemployment is structural; that’s more than 3 million jobs. A recent survey of 2,000 firms by the McKinsey Global Institute, a research group, found that 40 percent had positions open at least six months because they couldn’t find suitable candidates.

Samuelson partly finds fault in high schools and businesses offering less training, while community colleges aren’t in sync with local job markets. I also suspect that college graduates are majoring in the wrong subjects. Too many history and business majors, two few engineers. More from Samuelson:

In any dynamic economy, constant changes in technologies, products and companies naturally create gaps between skills available and skills wanted. But today’s gaps seem to transcend this. A survey for the National Association of Manufacturers in 2009, near the recession’s nadir, found that a third of companies still faced shortages. These were largest for engineers and scientists and among aerospace, defense and biotechnology firms.

This may also be a huge problem going forward: Here is the McKinsey Global Institute:

For example, MGI estimates that the United States may face a shortfall of almost two million technical and analytical workers and a shortage of several hundred thousand nurses and as many as 100,000 physicians over the next ten years. In aerospace, 60 percent of the workforce is aged over 45 years old compared with 40 percent in the overall economy.

My pal Tim Kane at Growthology lays it all out:

– The unemployment rate is now 9.1 percent, up from 8.8 percent two months ago. That’s important. Although research shows the U rate is more reliable than the payroll employment numbers over the long term, it might still suffer from a one month blip due to turnover in the survey sample. But a second increase in two months all but nails the coffin shut. By that I mean that the U.S. is experiencing if not a double recession then a historically stagnant recovery.

– The May payroll gains of 54,000 are nothing short of stunning. The U.S. lost 8 million payroll jobs during the recession. Adding 54,000 a month will get the nation back to normal … never! A recovery in the job growth number needs to average 400,000 a month to achieve the simplest recovery in 2.5 years. As it stands, the BLS commissioner is trying to emphasize the good news that the average payroll growth has been 220,000 for the previous 3 months. Let’s be clear: that is not a silver lining, it’s an indictment of the current course.

– The long-term unemployed increased in May by 361,000. Add that to the disturbing uptick in weekly jobless claims, stuck north of 400,000 a month.

– The labor force increased by roughly 1.2 million a year before the recession, peaking at 154.7m in Dec 2008. Two and half years on, it is 153.7m (a million souls fewer). Another way to think of this is that the labor force has roughly 4 million in extra-normal slack, people who have officially left/not joined the labor force but will come in as the economy recovers. This is a recipe for the unemployment rate to rise as things get better, but what we are seeing is the unemployment rising even as conditions slip.

I don’t think the terrible May jobs report means the Obama presidency is doomed anymore than I thought the killing of OBL meant re-election was in the bag. But another 18 months of economic muddling through – high unemployment, stagnant wages, dead housing, slow GDP growth – would certainly make the GOP nomination one worth winning. Like REALLY worth winning – let’s put it that way. And the history of economies after bank crises show the “muddling though” scenario is a common one.

But it is also interesting to note that White House economists told me previously that they didn’t think the U.S. economy would fall prey to that trap. No wonder the administration used so much political capital on health and financial reform rather than on job creation in 2009 and 2010. My chats with folks from the White House always showed them to be eternally  optimistic — eternally and overly optimistic is turns out. They were as surprised as anyone that Recovery Summer 2010 was a bust. And Summer 2011 is looking to be about the same. Yet there’s no sign the administration will change course and adopt some common-sense growth policies such as cutting taxes on corporations and capital, slashing regulation and offering a big downpayment on debt reduction.