Monday, August 10, 2009

What a difference 0.1 percentage point makes

Business Times - 11 Aug 2009

What a difference 0.1 percentage point makes


KEEPING score in Washington, not unlike on Wall Street, is possible only if we recognise that 'winning' or 'losing' in political battle as in financial combat reflects one's success - or lack of - in beating the expectations game, in doing better than expected by the experts who compose the conventional wisdom.

So after economists had predicted that the July unemployment rate would be 0.1 or 0.2 of a percentage point higher than June's 9.5 per cent, and the US Bureau of Labor Statistics reported on Friday that unemployment fell to 9.4 per cent, the Obama administration seized on the news to produce a spin that made it look as though the White House's efforts to end the economic recession were making a real difference.

President Barack Obama's press secretary, Robert Gibbs, told reporters that the new unemployment report was 'more evidence that we have pulled back from the edge and away from the brink of a depression', adding that the pace of job loss was 'declining and that's positive, but no one loses sight of the fact that last month, a quarter million people lost their jobs'.

And Mr Gibbs stressed - call it a pre-emptive action in the game of expectations - that Mr Obama still expected the jobless rate to hit 10 per cent later this year.

So, if the jobless rate does enter into double-digit territory before the end of the year, the numbers would be seen as corresponding with the strategy set by the White House.

And if the jobless rate continues to fall? Well, in that case, the better-than-expected figures would be spun once again as another win on the road to economic recovery by the Obama administration.

To be fair to the Obama spin meisters, one should acknowledge that if the July unemployment figure were higher by, say, half a point - that is, worse than expected - Mr Obama's Republican critics on Capitol Hill would have been savaging the administration's policies, arguing over and over again that the administration's expansionary fiscal and monetary policies had failed to revive the economy.

They would then have argued that, given this failure, Congress should not approve the president's ambitious healthcare and energy programmes.

Indeed, coupled with other indications that the economic recovery was on the way - including expectation for GDP growth in the third quarter, rising consumer confidence, and a re-energised stock market - the fact that the traditionally lagging indicator of unemployment was not lagging last month - in fact, the 0.1-point figure marked the first decrease in unemployment in 15 months - was certainly a piece of good news for the Obama administration and, on another level, for the entire economy.

But trying to interpret the unemployment figures is a classic example of one of those glass-is-half-full versus the glass-is-half-empty competing analyses.

Since the beginning of the recession, 6.7 million jobs have been lost and 14.5 million Americans remain unemployed, a figure that suggests that the economic downturn is not over.

Moreover, one reason that the unemployment figure is lower has to do with the fact that some Americans have stopped looking for full-time jobs. Hence, the broadest measure of unemployment (a figure that includes also those who are underemployed and those who are being discouraged from looking for jobs) remained high in July, hitting 16.3 per cent. Yet, even that figure was down from 16.5 per cent in June.

And the new US Bureau of Labor Statistics report also pointed out that hourly wages rose to US$18.56 in July after remaining stagnant earlier in the year.

Overall, employers cut fewer jobs last month - the auto sector and the leisure and hospitality industry even showed a slight increase - while payrolls cuts slowed in some industries.

All told, the pace of jobs lost is slowing down, suggesting that the slowdown in the economy is, well, slowing down.

But the expectation is that as the economy improves and more of the underemployed or those discouraged from looking for jobs start looking for full-time employment - new entrants into the job market - the official rate of unemployment could actually increase.

And this will play into the hands of the Republicans in Congress and other critics who will argue that the administration's stimulus package has failed to create the new jobs promised by the White House, in addition to being a drag on the economy.

Now, you know what to expect.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.