There's practically nothing to cheer in the latest jobs report, which came in far below expectations and is uniformly bleak.
Over the last month, the economy added just 18,000 jobs, compared with expectations of 100,000 or more. Most employment indicators are suddenly going the wrong direction. The unemployment rate has risen for three months in a row, to 9.2 percent. Temporary jobs are declining, when they ought to be picking up at this point in a recovery, as companies gradually expand their payrolls. The length of the average workweek is falling when it should be increasing. Pay is rising by less than inflation, which means many workers are falling behind. And more people are dropping out of the labor force altogether.
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Economists who thought we were tiptoeing through a temporary soft patch now view it as something more serious. "It is rather a deep, ugly swamp," says New York University's Nouriel Roubini. Forecasting firms are beginning to slash their outlooks for the second half of 2011, when many expected an encouraging rebound. Instead, we might now see anemic growth closer to the 2 percent pace of the first half. That could lead to even more distressing news about jobs.
Still, there are a few possible upsides to the discouraging job developments. It's worth keeping in mind that even though firms are barely hiring, the pace of layoffs is very slow too, according to outplacement firm Challenger, Gray and Christmas. That's largely because of the bloodletting that companies carried out over the last three years, which has left payrolls thin. So most people who have jobs can count on keeping them. And the weak job market itself could produce a few favorable economic effects. Here are five:
Needed action in Washington. Democrats and Republicans alike have been playing an odious game of chicken with the economy, threatening dire outcomes such as a default on America's debt obligations or the evisceration of Medicare if one side doesn't accede to the other's demands. If Congress and the White House can't agree soon on a plan to raise the federal debt ceiling, assure the continued operation of the government, and begin to address the alarming degree of deficit spending in Washington, then employers will become even more reluctant to hire and we could end up with a self-induced recession. All along, Washington has been playing a kind of wink-and-nod game with Wall Street and the business community, threatening doomsday in public while privately offering assurances that politicians will somehow save the day at the last minute. The latest awful jobs report suggests that CEOs and global investors aren't buying it. They want to see real progress in Washington, not endless Machiavellian maneuvering. Maybe the worsening job outlook—and a related drop in the stock markets—will finally spur politicians to stop jabbering and accomplish something.
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Low inflation. The Federal Reserve's "quantitative easing" program, which ended in June, essentially pumped money into the economy, raising the risk of runaway inflation in the future. That's one reason some skittish investors have flocked to gold and other safe assets. But high inflation is unlikely with a weak labor market, for a couple of reasons. First, a glut of workers in many industries means companies can pay less or at least keep wages steady. Since labor is often the biggest cost in the production of a good or service, stagnant wages tend to keep prices steady, whereas rising wages in a tight labor market often force producers to raise prices. Flat pay also means that consumers are likely to buy less, which means demand will be tepid, neutralizing another typical driver of inflation.
Falling gas prices. The cure for high gas prices is reduced demand, which is what happens when consumers are nervous about jobs and reluctant to spend. Gas prices have already fallen about 10 percent from recent highs of about $4 per gallon, and oil prices dipped again following the latest job news. Further signs of economic weakness could lead to further drops, which would be an obvious break for consumers.
More affordable homes. Prolonged weakness in the job market is bad news for housing. High unemployment usually means more people will default on their mortgages and even fewer will be able to buy a home. That could prolong the housing bust, now in its fifth year. But every drop in the average price of a home is great news for buyers, who already enjoy the best affordability in more than 40 years, thanks to depressed prices and low interest rates. The worse the housing bust is, the better the bargains will be for buyers once they can get loans and they're willing to buy. The catch is that buyers won't materialize in large numbers until they're pretty sure prices have stopped falling. But once a bottom is in sight, there could be a surge of buyers.
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A possible rebound in hiring. It's possible that the latest jobs report was an anomaly, and that hiring could pick up through the rest of 2011. If debt-ceiling negotiators are able to reach a credible deal without doing much damage, that could generate a significant boost in confidence that could ultimately prompt more hiring. Other indicators, such as small-business optimism, have been more positive than the headline jobs report, which could mean there are some hopeful undercurrents in the economy. And big companies remain relatively healthy and flush with cash, which means they're ready to hire. They just need a reason to do it.
Twitter: @rickjnewman
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