While the Obama Administration says the economy is strong and the unemployment rate is low, the reality is that there could be serious economic trouble ahead.
WASHINGTON, Oct. 3, 2015 − Recently released jobs data indicates that only 142,000 new jobs were created in September. Worse, the August number was revised downward to show only 136,000 jobs created. While the Obama administration continues to tell us that the economy is strong and the unemployment rate is down to 5.1 percent, the reality is that there could be trouble ahead and there may be little that policy makers can do to help.
Most of the reason why the official 5.1 percent unemployment rate is so low is that there are millions of Americans who are no longer in the labor force and are therefore no longer counted as unemployed. Based on historical data, we learn that about 67 percent of the adult population in the U.S. is typically either working or actively seeking work.
But today, that number has reached an historic low of 62.4 percent. That means that the real national unemployment rate would be about 9 percent if the labor force participation rate were at historical levels. But that more accurate number, while measured by the government, is not the one that is reported.
While growth picked up in the second quarter of 2015, the poor jobs numbers in the past three months, along with some poor data from other countries, indicates the U.S. economy may be in trouble and there is little that the government policy makers can do to stop a slowdown.
Historically the government would stimulate the economy by increasing spending or cutting taxes. But with annual budget deficits in the $500 billion range, increasing spending will be very difficult. Congress will not likely approve additional spending, especially considering the U.S. has reached the public debt ceiling. A new deal to raise the debt ceiling must be reached within the next 60 days.
Congress would like to cut taxes to stimulate the economy. President Obama will not go along with that especially if the tax cuts benefit those individuals who contribute the most to the economy and therefore have the largest incomes. These are the people that create capital for the economy, but the president believes that Congress just wants to give tax relief to the wealthiest Americans, who he says don’t need the relief.
With spending increases and tax cuts very unlikely at this time, the only other policy avenue is the Federal Reserve. But there, too, the options are very limited.
Normally the Fed would reduce interest rates and/or expand the money supply by purchasing large amounts of government debt, known as open market operations.
But today, interest rates are already near zero. The Fed has already used an available open market operations often referred to as quantitative easing (QE), from 2009 to 2013 with little success, finally bringing it to an end in late 2014. The fear now is that a return to QE could be very inflationary, so that option may not be viable.
The poor job creation numbers in the past three months could be an indication that the “Obama stagnation” will continue and possibly worsen in the coming months. While the number of newly laid-off people continues to be relatively low, that number may also increase.
A few very large companies have already announced massive layoffs. Hewlett Packard announced it will terminate about 33,000 workers, while Caterpillar will lay off more than 10,000 of its employees. Usually, when large companies announce layoffs, the effect ripples through the economy, causing more layoffs at smaller businesses.
Global demand for U.S. goods is also weakening. Economies in China, Europe, Canada and Brazil have slowed considerably with some countries in or near a recession. This puts further downward pressure on U.S. GDP (gross domestic product) growth.
Government policy makers have not made economic growth their primary goal since the recession officially ended in mid-2009. Since then annual GDP growth, during the Obama stagnation, has averaged less than 2.5 percent. Contrast that to the 4.5 percent annual growth rate during the years following the 1981 recession.
At this point the annual budget for 2016 has not been finalized, the debt ceiling has not been raised, monetary policy cannot be used to stimulate the economy and the president and Congress will never agree on tax cuts or spending increases. With the economy already appearing to slow, there may indeed be trouble ahead.
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