JUNE 1, 2012
Oy. Coming on top of new GDP numbers showing a mere 1.9 percent uptick in the first quarter, today’s jobs report is a real bummer. The headline number speaks for itself—an anemic 69,000 jobs, or about half what economists were expecting (though how they set those expectations remains a bit of a mystery). But the internal numbers were even worse. Today’s report showed downward revisions in the previous two months’ figures—including a steep drop from 115,000 to 77,000 in April; it showed the number of long-term unemployed (six months or more) rising by some 300,000; and it showed average hours and weekly earnings falling back. The only bright spot was that the labor force grew somewhat, usually a sign of optimism. But because the number of people looking for work grew faster than the number of jobs, the unemployment rate ticked up from 8.1 to 8.2 percent.
It’s certainly possible that underlying job growth is higher than we’ve seen these last two months, something you hear from the likes of Mark Zandi, the Monty-Python black knight of the macroeconomics profession (just a flesh wound!). As Zandi points out, unusually warm weather and various seasonal-adjustment quirks probably boosted job growth in the first quarter, which sucked up jobs that would have spread themselves out (either in reality or statistically) across the spring. Still, even if true, that underlying growth is nothing to get excited about. The average monthly jobs number for the entire year is only around 160,000—barely enough to keep up with population growth. And that’s before you throw in another month of likely payback in June, which would lower the average further.
In any case, it almost doesn’t matter if the underlying reality is better than the recent statistics. Against the backdrop of two or three months of mediocre data, this is a sufficiently grim set of numbers—and has inspired enough hand-wringing in the media—that it will clearly penetrate the consciousness of the average consumer and employer, who was already wavering on whether this recovery had legs. The danger is that the perception becomes self-fulfilling—that anxious consumers stop spending, anxious employers slow their hiring even more, and that the two reinforce one another in a vicious cycle of austerity.
Which, in the end, brings us back to the original sin of the Obama administration. As I report in my recent book on Obama and the economy, the administration’s top economists knew the amount of stimulus they were proposing was much too small to solve the unemployment problem within a few years. One reason they felt okay about this relates to a concept called “escape velocity,” which held that you didn’t need the full amount of stimulus your math suggested (something approaching $2 trillion). If you just provided an initial boost, the economy could take care of the rest on its own: Consumers would start spending, which would raise GDP, lower unemployment, and lead to further spending. And the whole process would accelerate as people gained confidence, leading to a self-sustaining recovery.
It was, in effect, a bet that you could get away with spending much less than necessary by manipulating mass psychology. And for a while it worked: The economy grew pretty rapidly in late 2009 and early 2010. But, as several administration economists have subsequently conceded to me, we never quite hit escape velocity, which is why we’ve been in stall speed more or less ever since.
The problem now is that the process threatens to reverse itself entirely. We risk slipping from stall speed to what’s known around the in-flight hospitality industry as a “sudden loss of altitude.” The same psychological forces that worked in our favor in late 2009 and early 2010 may soon start working against us. If that happens, trying for another $500 billion worth of stimulus in 2009 or 2010—however politically difficult (and I go into the “how” of this in my book)—will start to look like a small price to have paid for putting the recovery on sounder footing.
Update: An administration official writes to ask why I make no mention of the American Jobs Act, the $450 billion-ish stimulus package the president proposed last September. It's a fair question. I think the legislation, which would include another big cut in the payroll tax, extra spending on infrastructure, state aid for paying teachers, cops, and firefighters, and additional unemployment relief, among other good ideas, is absolutely essential. But I'd make two points in response. Substantively, the time to propose such a package was the spring of 2010, when Democrats still controlled the House, had close to a filibuster proof majority in the Senate, and the economy was giving off the first hints of a relapse. (I elaborate on this in my book.) By late 2011, the AJA was still a good idea, but it had virtually no chance of passage, which the White House understood as well as anyone.
Politically, on the other hand, it's still worth flogging the AJA aggressively. As my former colleague Jonathan Chait has pointed out, the worst of all worlds for the administration is for Republicans to block additional stimulus without taking any blame for it. If you're Obama, you have to get at least one victory there--either the stimulus itself, or an issue with which to bash the GOP. The administration finally grasped this last September, after two-and-half years of mostly giving the GOP a pass. But the focus on stimulus has largely given way in recent months to a combination of attacks on Romney's private equity career along with efforts to tout the Obama record (which is not too shabby, I'd be the first to concede, middling recovery aside). If the only thing the administration does in response to these latest jobs numbers is revive it's focus on the American Jobs Act, it would be a politically important turning point, though obviously you'd like to get the actual stimulus, too.
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