Good News In Manufacturing Activity

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When economists try to predict future economic growth, they look to manufacturing output.  According to the Wall Street Journal’s Real Time Economics, the Federal Reserve reported a surprising rebound in output with a growth rate of 0.8 percent.  That almost erased the loss of 0.9 percent decline from the last month.  Overall, industrial activity rose by 0.6 percent.

Economic growth is highly correlated with the production of goods.  Over the last couple of months, we saw a decline in manufacturing, which caused concern that our economic recovery could be weakening.  However, February’s data gives credence that the decline could have been due to poor weather.

When industrial output rises, that indicates that businesses are ramping up production in anticipation of consumers buying more goods.  If more sales activity occurs, then that will lead to more hiring and incomes will rise.  That is why we should be encouraged by this data.

Not all of the news was good, though.  Home-related durable goods production fell for the second month.  Even though this could also be weather-related, it is also possible that this could be a precursor to a slowdown in home sales.  If that happens, then that will be a drag on economic activity.

When home sales fall, then that will lead to less spending on household goods and home furnishings.  Both are necessary to drive economic growth.  Therefore, let us hope that these last two months of decline do not become a pattern.

Only the future will tell us whether the trend in manufacturing will offset the slowdown in home-related goods.

Three and Three Series: July Jobs Report

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In my inaugural three on three series, I will highlight three positives and three negatives that can be gleaned from July’s unemployment report released by the Bureau of Labor Statistics (BLS).

As for three positive takeaways,

  1. We saw the unemployment rate fall from 7.6 percent to 7.4 percent over the last month, and also experienced job growth of 162,000, which represents thirty-four consecutive months of positive job growth.
  2. A broader measure of unemployment (U-6) also decreased over the last year and is now down to 14 percent from 14.9 percent last year.
  3. Prospects of the long-term unemployed showed improvement with the median length of unemployment down from 16.8 weeks last July to to its current rate of 15.7 weeks.

However, there were also some negative takeaways, such as:

  1. This was the slowest amount of job growth since March and it fell short of analyst expectations of 180,000 jobs that were expected to be generated.
  2. Most of the job growth occurred in seasonal industries, such as retail trade and food services, while manufacturing and construction activity remain stagnant.
  3. While the labor force did not shrink much over the last year, the number of discouraged workers increased from 852,000 to 988,000.

In summary, the July jobs report was adequate, but little suggests that momentum is rising.  The next three months will be critical as we will see whether sequestration and congressional gridlock will darken future job prospects.

Jobs Are Steady Drizzle When Downpour Needed

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A look at June’s labor market shows no change in the unemployment rate of 7.6 percent, but there was an increase of 195,000 jobs created last month.  This marks thirty-three consecutive months of positive job growth.  Even though most of the job creation were in leisure and hospitality and retail trade (over 57 percent),  this total did exceed the expectations of economists, who were expecting growth of only 155,000.  Therefore, markets reacted positively.

Even though most of the job growth occurred in seasonal sectors, there were positive signs to draw in the broader measure of unemployment.  The U-6 unemployment rate fell from 14.8 percent to 14.3 percent over the last year.  This measure looks at those individuals, who are underemployed.  For example, an engineer, who loses his $80,000 job, but continues working part-time as a substitute math teacher at a fraction of that salary, would still count as being employed within the official figures.  However, earning a substitute teacher salary is a far cry from pay of a typical engineer.  Therefore, the U-6 rate would still count the engineer as unemployed.  Based on this rate decline, we can say that the labor market is brightening even when accounting for the normal seasonal gains.

As for the plight of the long-term unemployed, there was also some relief.  Of those unemployed, 36.7 percent have been looking for work for 27 weeks or more.  That is down from 41.7 percent last year.  While that is a positive sign, it is far from the 17.4 percent recorded in December 2007 when the Great Recession began.  This remains a concern because people who are out of a job for such a long period of time are more likely to experience diminished employment prospects well into the future.

On the downside, there was very little change in construction and manufacturing.  Large gains in construction infers that housing should be on the uptick.  More housing starts mean people will be buying more homes and that will lead to a multiplier effect where consumer spending will rise as they stock up on household and consumer items.  An increase in manufacturing activity is a sign that businesses are looking to expand and start adding to their payrolls.

While we can be comforted by the steady drizzle of job growth, a downpour of job creation will be needed to return to normalcy.  The Economic Policy Institute estimates that it will still take five more years before we will reach the pre-recession unemployment rate if current conditions are maintained.

Is Free Trade More Beneficial?

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UPS CEO Scott Davis asserts that the U.S. must move quickly in approving free trade agreements because it will increase our competitiveness and boost job creation.  As my economics students are aware, one of Mankiw’s key principles is that “free trade can make everyone better off”.

Certainly, free trade enhances efficiency an promotes economic growth.  By eliminating trade barriers with countries, we will see an increase in U.S. exports and that will create jobs.  Consumers will benefit as weaker domestic companies succumb to lower priced foreign competitors.  As we enjoy lower prices, this can boost purchases of additional industries, thus indirectly creating more jobs.

However, the key word is “can”, since everyone will not be better off with free trade.  In particular, industries with high paying, relatively low skill jobs will continue to disappear and be replaced with occupations that require greater skill sets.  This is an example of comparative advantage where the richer, advanced country (U.S.) will see an increase in higher-paying, complex jobs, while the smaller country (Panama) will start to benefit from lesser-skilled jobs in manufacturing.

The effects of comparative advantage will benefit certain segments of the population over others.  College degreed workers in math and science will reap the fruits of increased exports in high-skilled sectors, while non-college degreed individuals will see their wages dwindle further.  The West and Northeast where technology and educational outcomes are higher should see greater benefits than the South and the Midwest.

Therefore, should we promote free trade?  In my opinion, the answer is yes.  It is too late to take a step back and reverse the tide of globalization.  Placing restrictions on trade will only lead to lower living standards for everyone.  Rather than trying to prevent the inevitable, policy analysts need to focus their energies on helping all Americans make the transition to the global economy.

That will take a two-pronged approach where technical and vocational occupations should be emphasized in the short-term, and a stronger commitment to K-12 school systems in the long-term.

There are certain good paying  jobs that will never be outsourced, such as plumbing, welding, and auto mechanics.  Without the proper foundation in high school, it is just too difficult for many to transition to the math and science disciplines where the high paying jobs are.  Therefore, we should encourage more toward this area instead of pushing them into institutions of higher learning.

As for our public school systems, we need better communication between administrators, teachers and parents.  School administrators and teachers need to inform parents of the importance of developing strong study habits at an early age.  When they are in high school and have not been studying an average of two hours a night on their homework, it is unlikely that behavior will change by that time.  That type of work ethic is key to mastering the rigorous subjects that will be highly valued in the global economy.

By lowering the bar and coddling our youth, we are only hurting them later.