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At Last, Some Job Creation

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).



The gloom is dissipating. It might be because Congress is in recess, and therefore unable to add any billions to the burgeoning government debt, at least for a few weeks. It might be because spring is sprung. And it might be because most people are focusing less on the economy and more on the NCAA basketball finals, and on the opening of the baseball season Sunday night than on the economic news.

More likely, it is because the jobs market is improving. Not much, but at least the declines seem to be over: 162,000 new jobs were created in March. Back out the 48,000 hired temporarily to help with the census, and you still have positive growth. Employment in the hard-hit construction industry, which lost 864,000 jobs in the past twelve months, held steady, while jobs were added in manufacturing, mining, health care, and temporary services. And for technical reasons these official figures probably understate job growth.

But no economic silver lining comes without a cloud these days: the number of people out of work for 27 weeks or more increased by 414,000 to 6.5 million, the unemployment rate remains stuck at 9.7%, and the total unemployed, involuntarily underemployed, and too discouraged to look for work now constitute 16.9% of the work force. That's a lot of people in distress.

Still, the resumption of job creation is good news, and only one of the signs that the recovery continues. Share prices in the just-concluded first quarter were up about 5%, their best start in more than a decade, as corporate profits came in better than expected after rising by 8% in the fourth quarter of 2009, and corporate balance sheets remained strong. Bonds also did well, with investment-grade U.S. debt and junk bonds up from their 2008 lows by 35% and 82%, respectively. So far, the fear that massive fiscal deficits will trigger inflation, a rise in interest rates and therefore a fall in bond prices, seems to be confined to a minority of investors. The majority are ignoring what might be the canary in the coal mine -- a rise in interest rates demanded by purchasers of U.S. government bonds. The yield on the Treasury's 10- year bond is hovering around the psychologically important 4% level, the highest since June 2009.

The performance of share and bond prices contributed to a recovery in consumer confidence after a sharp drop in February -- it rose from 46.4 to 52.5 in March (1985=100). Which might explain last month's spurt in car sales.

General Motors' sales of brands it intends to continue were up 43% year-on-year, Ford sales were up 40%, Toyota's rose 41%, and although Chrysler's sales fell by 8%, the company expects to break even this year after years of losses, a performance CEO Sergio Marchionne attributes to ridding the company of consultants: "We had more consultants in our place than God knows." Some portion of Toyota's sales spurt was due to what the industry calls "incentives" (aka discounts) of $2,256 per vehicle offered in order to win back customers the car maker had lost over safety issues. These incentives were up from $1,565 last March, according to Edmunds.com True Cost of Incentives report.

The good news was not confined to the auto sector. Overall consumer spending seems to be growing at an inflation-adjusted annual rate of 3%, the highest since the first quarter of 2007. Rosalind Wells, chief economist at the National Retail Federation, described in the Financial Times as "a near-ubiquitous presence in US shopping malls," says "consumers are coming back to life a little," the sort of measured statement that I hope she learned when working as my talented research assistant decades ago. It might at first seem counter-intuitive, but the wave of mortgage defaults and personal bankruptcies are leaving consumers with more cash to spend as they relieve themselves of the burden of paying off loans and mortgages.

More good news. The Institute for Supply Management (ISM) reports that the manufacturing sector as a whole grew in March for the eighth straight month, and at the fastest pace since July 2004, to a six-year high. Seventeen of eighteen industries reported growth (only plastics lagged, belatedly proving that Dustin Hoffman's graduate, Ben Braddock, did well to ignore the poolside advice he was offered). Exports were up, as were inventories, the latter in anticipation of re-stocking by retailers and higher sales. A global survey of 11,000 companies by KPMG shows mounting optimism worldwide, with U.S. manufacturing and service sector firms even more optimistic than those in all other countries, with the exception only of Brazil (discovery of oil and the prospect of the Olympics might be a factor in Brazilians' cheerfulness). That optimism by business leaders accounts for the increase recently recorded in business investment, which is being counted on to drive growth if consumers once again retreat from the malls for a while.

Most forecasters are guessing that when the final numbers are in, they will show that the economy grew at an annual rate of around 3% in the first quarter of this year, below the 5.6% rate of the final quarter of last year, but more than satisfactory. Several businessmen with whom I have talked, some of whom were in the pessimist camp only recently, are now talking about a V-shaped recovery, a rebound of vigor and duration.

Unfortunately, that view is not uniform. Small business owners and entrepreneurs are somewhat gloomier. Some do not do much or any export business, and so are not sharing in the recovery of world trade. Many complain that their banks don't want to know them when they ask for credit. Others worry that the health care bill will drive up their insurance premiums. Still others know that the taxes on their personal incomes are due to rise as marginal income tax rates go from 35% to 39.6%, capital gains rates go from 15% to 20%, a new Medicare tax of 3.8% is charged on income, dividends and capital gains for families and individuals earning more than $250,000 and $200,000, respectively.

Phasing out of some exemptions and deductions will add still more to the tax burden. All of this reduces the incentive to invest and hire. Which brings us to the housing market, which remains difficult to analyze. There are signs of stability. Twelve of twenty cities covered by the S&P/ Case-Shiller index of home prices show modest increases, and the overall price index rose in January (latest month available) for the eighth consecutive month, to almost the levels reached one year ago for the first time in three years.

Big publicly traded builders have cut costs, sold assets, benefited from tax breaks and are now preparing for a housing recovery by buying construction-ready lots, often at prices below the cost of improvements. They reckon that will permit them to keep prices of newly built houses low enough to attract on-the-fence buyers. Warren Buffet, whose Berkshire Hathaway owns Clayton Homes, a maker of manufactured-housing, predicts that "within a year or so residential housing problems should be behind us." Investors are among the optimists: home builders' shares have nearly doubled over the past year.

These optimists may be in for an unpleasant surprise. New home sales are still lagging, the supply of unsold homes remains high, the tax credit for first- time buyers expired last week, at the same time as the Federal Reserve Board discontinued its $1.4 trillion program to purchase mortgage-backed securities in the expectation that private investors will take up the slack. The housing market is key to creating construction jobs, and all of the jobs that go with furnishing a new home. If these headwinds prove too strong for a housing-market recovery to overcome, the spring and summer buying season will see the bears emerge from hibernation, especially if the recovery proves to be only "a sugar high" based on unsustainable government spending and low interest rates that the bond vigilantes will, sooner rather than later, drive up.

My own guess is that the recovery will gather pace. If the Fed is to err, it will err on the side of waiting too long to "exit"; there is no sign that the government will rein in spending -- increases are more likely; a wall of money is sitting on the sidelines looking for investments or deals. In the longer run, of course, we will have to pay the piper for the administration's Greek-style fiscal policy. Meanwhile, enjoy the ride.
By Irwin. M. Stelzer
Reprinted with permission from The Weekly Standard

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