Daily commentary: As predicted, the US jobs report was weak

I wrote you last week after the third consecutive elevated jobless claims report, saying this was a definite harbinger of a weak jobs report. This has proved true. While March’s gain of 120,000 jobs was revised up to 154,000 and unemployment declined from 8.2% to 8.1%, payrolls rose by only 115,00.

The US economy needs to increase jobs by 100,000 per month just to deal with population growth. At this point in an economic cycle, we should expect 300,000 or 400,000 new jobs if things were doing well. But they are not. Unemployment declined because the labor force participation rate fell to 63.6 percent, the lowest level since 1981. The total number of unemployed persons in the US is 12.5 million.

I see GDP growth coming in slightly below 3% – probably around 2.5%, with downside risk – this quarter followed by weakening but still positive growth. Then you get to the fiscal cliff because we will hit the deficit ceiling in the US even before the election in November. John Carney reminds us that it’s a debt ceiling, not a spending ceiling, which limits the US federal government.

The debt ceiling places a limit on how much debt the Treasury Department may issue. It does not say anything about spending and does not prohibit the government from spending in excess of its revenue.


A lot of people seem to have become confused on this issue because they fundamentally do not understand the economics of government spending. They imagine that government is like a household that must fund itself through generating revenue or taking out loans. You hear politicians use this analogy all the time.


But the government could also just pay all of its bills, ignoring the fact that the account at the Federal Reserve is empty. So what happens when the government writes checks on an account with no money? Nothing out of the ordinary. Those checks will all clear, with deposits made in the recipients’ bank accounts just as they would have if the account was not underfunded.

John might be technically correct (although I have doubts), but politically this issue will be resolved by raising the ceiling and attaching some kind of spending cut to it as a quid pro quo. President Obama has been able to forestall the move to fiscal tightening a long time. However, I doubt he will be able to do so again in late 2012 and 2013.

Bottom line: US fiscal policy will become less supportive of growth by 2013. So my prediction of fiscal tightening (and recession) with four years remains on track.

That’s it. Here are the links.

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