It’s the Jobs Stupid!!

From Brad DeLong: http://delong.typepad.com/sdj/2009/07/bad-news-about-industrial-production-sigh.html

Here’s a trajectory for POTUS to chew on from the recently released statistics on Industrial Production and Capacity. This is a key indicator of an economy’s well being. It’s down again. There’s something about Obama’s use of the words “right trajectory” on Anderson Cooper the other night that makes me think he should ask Harvard to give him a bit of a refund on that ‘education’. How hard is to understand that when production keeps falling that is not a good trend? He’s had to have the inside scope on these numbers for at least a week. Why give Cooper and the world the impression of something else?

Industrial production decreased 0.4 percent in June after having fallen 1.2 percent in May. For the second quarter as a whole, output fell at an annual rate of 11.6 percent, a more moderate contraction than in the first quarter, when output fell 19.1 percent. Manufacturing output moved down 0.6 percent in June, with declines at both durable and nondurable goods producers. Outside of manufacturing, the output of mines fell 0.5 percent in June, and the output of utilities increased 0.8 percent. The rate of capacity utilization for total industry declined in June to 68.0 percent, a level 12.9 percentage points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9 percent in December 1982.

The graph (which uses seasonally adjusted data) comes from Brad Delong’s “Bad News About Industrial Production”. I would imagine his education taught him the right frame for what is the ‘right trajectory’ and the ‘wrong trajectory’ when discussing macroeconomics with his UC Berkely Students. I know my economics professor Campbell R. McConnell taught me well at the more humble University of Nebraska where I cut my economist baby teeth. Now, I know we’re supposed to be a service economy and that things like manufacturing, transportation and mining aren’t supposed to be relevant to us any more. I still can’t help asking how many young people with nothing more than a devalued high school diploma would rather face a life building cars than mowing the lawns of Goldman Sachs Bankers? Is any one beginning to have similar questions on the mythical hope and change meme of last year? Is it still just you and me? The Sinoperuvian lesbians of hillbilly America?

Today, even the editorial page of the Gray Lady even asked the right questions.

Unemployment is rising. Foreclosures are surging. Lending is still constrained. So why exactly is the Obama administration waiting to act?

Their answer is not so different from mine of the past two days.

If wait-and-see is anything other than a near-term tactic, it’s bound to be a miscalculation. The need for expanded relief and recovery efforts is compelling. Rather than avoid those fights, the Obama team must win them.

The Index of Industrial Production is a key leading indicator of macroeconomic health. It is released monthly by the Fed. “The indicator measures the amount of output from the manufacturing, mining, electric and gas industries. The reference year for the index is 2002 and a level of 100.” It is sitting now at 95.4 (which of course is less than 100) which means it’s lower than it was when the index was set. It measures REAL production output. This means were producing less stuff and of course, that means there are less people necessary to hired to produce less stuff. That’s not good.

Another number was released today. That would be the measure of Consumer Price changes (CPI) or the measure of inflation faced by households. This has another unhelpful trajectory. It is up and mostly by way of higher gas prices, clothes, and other things. High petroleum prices also play into higher costs for businesses which will adjust production downward when faced with higher transportation and energy costs. While this index doesn’t address the prices faced by businesses directly, there is of course some carry-over when businesses face retail gas prices and electricity prices. Here’s some info on that from the WSJ. There’s a pretty good break down there of what exactly you are paying more for. Automobiles are not one of those things. Their prices fell at annual rates not seen since the Truman years.

While up, the increase in prices is not going to trigger Fed Inflation fears yet since it within their boundary of acceptable levels of inflation. I’m not sure that’s worth much to most of us however, given this:

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, plunged 1.2% in June, an indication that paychecks didn’t even come close to keeping pace with consumer prices.

So, let’s get this all into a little package we can deal with. You’re being paid less, but your basic expenses are going up. You’re really fortunate to have a job right now and even more fortunate to have health insurance. But don’t count on these too much, because both of those situations will get worse before they get better. You could potentially buy a new car, if you had a job or if you weren’t swimming in record levels of debt already for all those Chinese goods you bought by credit a few years ago. You used to feel pretty good about your retirement and the nest egg you have in your house, but the last ten year’s of their appreciation and return just disappeared. You’re facing higher taxes, but it’s not because you’re getting huge bonuses unless your working for Goldman Sachs which is made money this year on the bargain basement sell off of AIG stuff to them using tax dollars we know don’t have to pay for unemployment insurance, social security, and Medicaid and Medicare. There will be fewer policemen and firefighters on the street. Your younger children will sit in much more crowded classrooms. The banks are still profiting from the incredible student loans your will be saddled with through most of their adult lives by attempting to get up there to something remotely resembling middle class life.

Oh, and there’s this.

With inflation seemingly under wraps and the economy still mired in recession, Fed officials are widely expected to keep official interest rates near zero into 2010.

But then, that makes no difference because the banks are killing you with fees and your credit card companies are kicking up your interest rates because they couldn’t figure out good risk from bad. You have to pay twice over for their bad decisions and their political contributions. It also means if you attempt to save, you might as well do it in a mattress because you’re not going to get any rate of return. If you look at bonds, beware, because low interest rates mean high bond prices, and you don’t want to be caught buying high priced bonds whose value falls when interest rates do start rising.

Meanwhile, Paul Krugman explains it all yet again in his blog post “Deficits saved the World.” Do we need a second stimulus? Hell yes! Chew on this quote for awhile then go look at the supply and demand curves if you really want to do it in the wonk zone. Automatic Stabilizers means all those programs like unemployment insurance that didn’t exist prior to FDR and the Great Society moves. This says it all. It’s not the Obama stimulus package that has kept us away from the edge, it was the programs put into place way back then that have kept us from going all the way again.

That’s an interesting way to think about what has happened — and it also suggests a startling conclusion: namely, government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression.

Just imagine what it would mean if we really had a visionary in the office? Meanwhile, some one needs to send a message to the White House. It’s the JOBS stupids!!!!!!

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