Get ready to hear this arcane economic term in the months ahead: liquidity trap. That’s when monetary policy becomes ineffective because interest rates cannot go below zero, trapping the economy in a no growth/slow growth malaise.
This is roughly the same situation Japan found itself in when its real estate bubble burst in the late 1980s. Despite repeated attempts by Japanese monetary experts to stimulate the economy then, Japan slowly slipped into a deflationary spiral that produced a “lost decade” for the Japanese economy.
The Federal Reserve is increasingly worried about the pace of the U.S. recovery and continues acting to keep the economy from slipping lower. At the last Open Market Committee meeting earlier this month, the Fed said "the pace of recovery in output and employment has slowed in recent months.” The Fed also said it would buy Treasury bills in an effort to keep the economic recovery on a positive track. That is classic Fed policy — buy to expand, sell to contract.
When the Federal Reserve buys Treasuries, it pushes money into the economy. Banks, supposedly, then have more funds on hand than needed to meet reserve requirements and so are more willing to lend that money out. Interest rates fall and the economy expands.
When the Fed sells its Treasury investments, the opposite should happen. Remember the Fed always gets its price and never is refused on either side of the equation. So when it sells Treasuries, it takes money out of the economy and most large commercial banks must buy them, reducing their funds on hand. Interest rates rise, banks are less willing to lend and the economy cools.
But what happens when interest rates are already effectively at zero? T-bills sold in the last auction (Aug. 12) at a discount rate of 0.145 percent. Factor in the modest inflation existing now and the rates are at zero.
In Japan, the burst of the real estate bubble — the palace grounds in Tokyo reportedly were once valued at more than all the real estate in California — led to a deflationary spiral. Real estate and stock prices plummeted. Prices for consumer goods dropped, and shoppers stopped buying because they expected prices to go even lower. Production slowed and wages dropped, further reducing spending power. The Japanese economy entered a long malaise.
Is the U.S. headed in the same direction? Could be. Core inflation — prices for everything except the volatile food and energy sectors — was up 0.9% year-over-year in June, the slowest rate of increase in 44 years, according to the Bureau of Labor Statistics.
Another measure, called the GDP deflator, also showed low inflation. According to the Bureau of Economic Analysis, the price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.1 percent in the second quarter. Excluding food and energy prices, the index increased 0.9 percent. The GDP inflation figure is often regarded as more reliable because it is based on actual purchases vs. the survey that is used for the Consumer Price Index.
How do Washington state and the Seattle area fit into all this? New figures released today for unemployment in July tell a very similar story to the national picture. The state had lost 2,300 jobs between June and July, again primarily due to declining government jobs, which more than offset growth in the private sector.
The unemployment rate stood at 8.9 percent, down slightly from the June rate of 9 percent. The June rate was revised upward in the report today from 8.9 percent and, more importantly, the number of jobs lost in June was revised to more than 5,000.
Government shed 5,400 jobs in July, while the private sector added 3,100, led by 1,000 in transportation, warehousing and utilities. Construction and education and health services grew by 900 jobs over the month.
The unemployment rate in the Seattle-Bellevue-Everett metropolitan area actually rose to 8.4 percent from 8.3 percent in June. The number of unemployed increased slightly as well to 124,900 from 124,400 in June. Snohomish County was at 9.4 percent vs. 9.7 percent in June. Tacoma was at 9 percent vs. 9.1 percent. The highest rate was in the Clark County/Vancouver area at 13.3 percent; the lowest was San Juan County at 5.1 percent.
“It’s tepid growth,” said David Wallace, chief economist for the state Employment Security Department. He said it might be too early to tell if the numbers reflect a stall in the economy. The unemployment rate, however, was the lowest in more than a year.
Wallace said it is more important to focus on the job creation aspects of the report and there the situation is less positive.
Economic statistics can be confusing at times. Take the recent report on Gross Domestic Product. The headlines focused on the fact that GDP growth declined to 2.4 percent in the second quarter from 3.7 percent in the first quarter.
One of the reasons for the slower growth was that imports picked up, growing nearly 30 percent from the previous quarter. Imports are deducted from GDP figures because the goods were made elsewhere — they were not part of the total of goods and services produced in the U.S., the definition of GDP.
But a surge in imports has been good for the Port of Seattle with a sharp increase in the number of containers unloaded at the port. That translates into jobs for longshoremen, truck drivers, and others. Today’s report showed an increase of 1,000 jobs in the transportation/warehousing sector, an increase Wallace called surprising. It is also positive in the sense that it means retail businesses expect sales to pick up, so they are stocking up with additional products.
So here, a decline in the growth of GDP is a positive even though it may be a negative elsewhere.
But the state does reflect the national employment picture, where the “jobless recovery” still is in full force. The economic recovery that was supposed to be gaining ground this summer and fall has begun to falter, a fact likely to have an impact on elections this November should it continue to slip.
The numbers are not good. The Bureau of Labor Statistics said in early August that total nonfarm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent. Federal government employment fell as the 2010 Census work was completed, while the private sector posted a paltry gain of 71,000 jobs.
The number of unemployed persons, at 14.6 million, remained unchanged. The unemployment rates among major worker groups are interesting: adult men, 9.7 percent; adult women, 7.9 percent; teenagers, 26.1 percent; white people, 8.6 percent; black people, 15.6 percent; Hispanics, 12.1 percent; and Asians, 8.2 percent.
Another disturbing part of the report is that the labor force participation rate has dropped six-tenths of a percentage point since April, representing people who have just dropped out of the labor force. Taking this into account, the unemployment rate really would be in double digits at 10.1 percent, below the peak unemployment earlier this year of 10.6 percent but still higher than most believe.
The Bureau of Labor Statistics also tried to measure other factors that affect the work force. Using one measure that includes all unemployed workers plus those marginally attached, plus those employed part-time for economic reasons, Washington’s unemployment rate reached 17.4 percent for the period from the third quarter of 2009 through the second quarter of 2010.
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