Half way through the year, we are still trying to figure out where the economy is headed — over a cliff or sputtering back to life? An article in The New Republic says the discouraging May jobs report could mean we are entering the second Great Depression unless there are more stimulus programs from Washington. Other economists say one-month changes are unimportant and we need to look to longer trends.
Another unresolved question is why the Washington economy, seemingly in an advantageous place, is not doing better. More on that below.
One of the problems with economic statistics is that the ordinary person is lost in the size of the U.S. economy. When prices are measured across 150 million workers in a $13 trillion economy, individual circumstances are drowned in a sea of data.
Let me illustrate with a little example. I was at a Mariners game a few years ago when the buzz started that Bill Gates was there. The 40,000 or so people who attended that game probably represented a cross section of the region. The crowd probably reflected the per capita personal income of a Seattle-area resident then, about $50,000. They owned homes or rented apartments. They were kids, couples, grandparents, or young adults on a date or with friends.
Counting homes and other assets, the crowd might have had an average net worth of $250,000 a person. But Bill Gates walks into Safeco Field to watch the game and suddenly things change. With his Microsoft stock alone worth more than $40 billion at that time, average — keep that word in mind — average net worth per Mariners fan that night jumped to $1.25 million.
The same thing happens to overall economic statistics. When you count so many people, so many businesses, and so many different regions, a couple living in their family home on a fixed income finds their own situation misrepresented by those broad-average economic figures. There is a classic definition of a recession vs. a depression: A recession is when your neighbor loses a job; a depression is when you lose a job.
Back to that June 3 jobs report. It points to an economy that is hitting a slow patch. But it is not an overall economic slump. In an economy as large as the U.S., the overall picture distorts what might be happening in individual regions; so you need to disaggregate the data. Some regions may be doing better than others. Are we? We ought to be.
The Federal Reserve puts out its "Beige Book" every six weeks or so. It is a compilation of reports from the 12 district banks that make up the country’s central bank. In the Twelfth District, which includes Washington and the West Coast, the June report was upbeat: “Twelfth District economic activity continued to expand at a moderate pace during the reporting period of late April through the end of May.”
At the Atlanta bank, it was a different story: “Sixth District business contacts reported that economic activity moderated somewhat in April and May. Retailers experienced a deceleration in sales and traffic, which they attributed to periods of adverse weather and high gasoline prices.”
Overall, here is what the Fed said about the economy: “Reports from the 12 Federal Reserve Districts indicated that economic activity generally continued to expand since the last report, though a few Districts indicated some deceleration. Some slowing in the pace of growth was noted in the New York, Philadelphia, Atlanta, and Chicago Districts. In contrast, Dallas characterized that region's economy as accelerating. Other Districts indicated that growth continued at a steady pace.”
So if that is true, if places like Seattle and Washington state are doing better than the rest of the nation, then the data should reflect that. However, that’s not the case.
The state on Thursday issued another gloomy forecast for the state's economy with the only bright spots in technology and aerospace. Construction in particular remains in a slump, according to the June update. State revenues also are still under pressure. The Economic and Revenue Forecast Council said that "in the next biennium, weaker near-term revenue growth is expected to bring in $223 million less revenue than forecasted in March."
On June 15 the state Employment Security Department said that in May, Washington state lost 700 jobs on a seasonally adjusted basis. Even more surprising is the fact that the private sector was down 900 jobs while the public sector added 200 jobs over the month. The national report released earlier this month showed the reverse, with the private sector adding jobs (albeit anemic) while the public sector continued to lose lots of jobs.
What about a year-over-year look at the Washington economy? That's a bit more promising, but still shows job growth is weak. Compared with May 2010, there are 33,300 more jobs than a year ago. The private sector added 49,400 jobs over the year and the public sector lost 16,100 jobs. More than 70 percent of the annual gains occurred in the last five months.
Washington’s seasonally adjusted unemployment rate in May 2011 fell slightly to 9.1 percent from April’s revised rate of 9.2 percent. (Originally the unemployment rate for April was 9.1 percent.) The May 2010 rate was 9.6 percent. In other revisions, the department said there were 1,100 fewer jobs added in April than originally estimated — 4,700 jobs vs. the preliminary employment gain of 5,800 jobs. In the Seattle area, the unemployment rate dipped slightly to 8.6 percent from 8.7 percent in April.
The unemployment rate that covers a wider range of workers, the U-6 rate, was still a high 18.4 percent in Washington. The rate covers the total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, plus all marginally attached workers. The highest rate was in Nevada at 23.7 followed by California at 22 percent. Nationally, the May 2011 rate is 15.8 percent vs. 16.1 a year earlier.
In sum, the latest figures about the economy declare clearly that the slowdown is real.
Seattle should do better because the economy here is better with Boeing, Microsoft, and Amazon among the large companies that are adding workers. The Seattle-Bellevue-Everett area did see a drop in the number of unemployed by about 2,000 positions, but the total labor force declined as well. That means a few jobs were added but more people apparently gave up looking for work. The decline in the local unemployment rate was very small.
There are a always some unusual factors affecting short-term job market statistics. The data for one month can be skewed by all kinds of external factors — weather, natural disasters (the tsunami in Japan and the tornadoes in the Midwest are good examples), inventory imbalances and so forth. The Japanese earthquake and its consequences in supply chains may be the major explanation for the continued doldrums in Washington state. Bad weather usually results in a drop in average hours worked, which happened in May all across the nation.
The basic local drag on growth is this: Unless you are an engineer or skilled in informational technology there is not much in the way of job growth or opportunity. The San Francisco Fed in another part of its Beige Book report spells this out: "Although hiring activity has picked up, high unemployment and ample labor availability continued to limit the pace of overall compensation gains throughout the District. The primary exception continued to be workers with specialized technical skills, particularly engineers and specialists in information technology."
There could be more fundamental problems, such as high energy costs that reduce spending on other items, or a default in Greece.
The worry with Greece is a domino effect where Greece defaults on its bonds, causing problems in other countries such as Portugal or Ireland. That put pressure on European banks and then U.S. banks. Another financial crisis is possible. The stock market is certainly spooked by it all, dropping substantially this past week and down 1,000 points off its high in May. The stock market is a leading indicator so it seems to be seeing a slower economy or more adverse events (like the U.S. Congress's game of Russian roulette on raising the debt ceiling) pushing the global economy down.
But if the pace of the economic recovery is slowing as we move into the summer months, there is little sign of a “double dip” recession. It is only the pace of growth that is slowing.
The state Economic and Revenue Forecast Council put it this way in its most recent report in early June:
“Since our March forecast, the economic recovery has run into yet another soft-patch. While growth continues, it does so at a slower rate than before. As we had feared in March, dual headwinds of sustained high gas prices and disruptions to the manufacturing supply chain due to power shortages in Japan have caused the sails of the recovery to start luffing. We were correct in evaluating the downside risks to be twice that of the upside risks.
“The recovery, however, is likely to continue and even pick up momentum in the second half of the year. Gas prices remain high, but have retreated from their peaks, and the economy proved more resilient to them than we had expected. On the other hand, the repercussions from the disaster in Japan have turned out to be worse than we had thought. Not only did it constrain consumer spending by not having enough goods available, but it also put a crimp in the remarkable recovery that had been unfolding in the U.S. manufacturing sector. Later this year, as Japan starts rebuilding, much of that negative impact will be more than offset.”