US jobs: The recreation of lost US jobs has hit a soft patch. The May employment report, showing only 54,000 jobs gained and a rise in unemployment to 9.1 per cent, adds to evidence that stimulus hasn’t worked. Fiscal handouts may now be off the political table. But on the monetary front higher rates, not further easing, could now do more for jobs.
The underlying jobs picture isn't quite as gloomy as the headline. Local government jobs declined, but the private sector added 83,000 — and that figure might have been higher had manufacturers not shed 5,000 jobs partly as a result of the supply chain disruptions caused by Japan’s earthquake and tsunami in March. Severe tornadoes across the South didn’t help either.
However, one rather more depressing statistic was the increase in the number of the long-term jobless, now representing 45 per cent of total unemployment. Many of these individuals risk becoming unemployable and could drop out of the workforce, which has already declined by 2 million in the last year.
The weakness of job creation in this recovery, along with other recent soft data, suggests a risk of economic stagnation or even, in the worst case, a double-dip recession. If expansionary fiscal and monetary policies helped at all, which is far from clear, the effect has run its course.
Fights over budgets and now the federal debt cap demonstrate that calls for lower spending, not fiscal stimulus, are winning in Congress. Austerity will inevitably cost government jobs, but over time that should be counterbalanced by employment gains in the private sector. On the monetary front, though, it isn't so certain that Ben Bernanke’s Federal Reserve is ready to unwind its low interest rates and bias toward stimulative bond-buying, or quantitative easing, the latest bout of which — known as QE2 — is due to end this month.
Ultra-low rates have contributed to high commodity and energy prices that feed back negatively on economic growth and risk creating inflation. As promised by economic theory, it's also likely that cheap money has encouraged businesses to deploy capital rather than labour, thereby slowing private-sector job creation. Calls for more stimulus, including QE3, should be resisted; it's time for the Fed to try something else, and raise rates.
