Construction Forecasts

News & Analysis

Europe’s debt woes may send U.S. hiring into suspended animation

06/05/2012 by Alex Carrick, RCD Canadian Chief Economist

In May, the U.S. economy generated 69,000 net new jobs and the unemployment rate climbed 0.1 percentage points from April to 8.2%, according to the Bureau of Labor Statistics.

Neither figure was welcomed by the stock markets. They viewed the latest data as demonstrating a marked slowdown in the nation’s hiring activity.

In turn, this threatens to derail forward momentum in consumer spending and confidence. It will also inhibit whatever mild progress has been observed of late in new home starts and prices.

Month-to-month employment needs to rise by at least 150,000 to 200,000 to make much of an impact on the nation’s underutilized stock of labor. Such a rate of gain, over time, will lower the current high unemployment rate.

The current jobless rate of 8.2% compares with levels below 5% during the middle years of the last decade.

Since the last time there was a drop in U.S. employment (September 2009), 3.1 million net new jobs have been created.

Over a slightly longer time horizon, there are now 3.8 million more jobs than when the recessionary trough for U.S. employment occurred in February 2010.

Those numbers are starting to make a dent in the 8.5 million jobs that were lost in the downturn.

It’s also interesting to note that U.S. employment has risen above the level of peak employment in the up-cycle before the last one – that is to say, the peak prior to the dot.com collapse.

The jobs total has increased in each of the latest 20 consecutive months.

Here’s a statistic that hasn’t received much coverage. Services employment – which accounts for 70% of the total – is only one million jobs short of its previous peak in January 2008.

Unfortunately for our industry, construction employment remains low and flat, with a decline of more than two million from the halcyon days of 2006 and early 2007. At that time, homebuilding job-site activity was still holding up well.

The number of manufacturing jobs is edging higher after a long period of decline. The auto sector can lay claim to a sizable share of the credit. Employment in motor vehicles and parts manufacturing was +8.3% in May, a strong advance.

So not all the news is bad on the jobs front, but previously positive sentiment about the economic outlook is being sidetracked.  

President Obama – whose own job may very well ride on the monthly labor market reports between now and November – is blaming the latest manifestation of the credit crisis in Europe for the apparent inertia.

The Greek vote on June 17 will determine whether or not that nation stays in the Euro zone.

At the same time, uncertainty about how to rescue banks in Spain is adding to the downside risk for Europe.

A collapse in property prices has left the Spanish financial sector awash in bad debt.

Bankia, the third largest bank in Spain, has been nationalized by Madrid. The prospect of Spain being saddled with additional debt is driving up the nation’s 10-year bond yields.

They are approaching the benchmark level of 7.00% at which Greece, Ireland and Portugal were forced to seek outside help with their finances.

The European Stabilization Fund is currently prohibited from providing rescue money directly to the banking sector. Financing assistance can only go to central governments.

The Spanish government is reluctant to seek such help. There is an unofficial price that consists of a stigma.

It would be tantamount to saying the country needs bailout money the same as the Euro-zone’s lesser lights.

The size of the Spanish economy is equivalent to Greece, Ireland and Portugal added together and doubled.

Many academics and analysts are frustrated that Germany isn’t doing more to solve Europe’s problems. German intransigence with respect to possible solutions is becoming an issue on its own.

Germany is most notoriously opposed to the notion of joint-country backing for Euro bonds since, almost alone among the currency’s 17 members, this would raise the interest rate it would be charged.

Chancellor Merkel may have a point. Socialist tendencies in many European countries have been more entrenched than in North America. Public sector employees have often been receiving an easy ride.

Avoidance of paying taxes and black market activity are also more of a factor in some of the southern economies on the continent.

With aging populations, and fewer young people entering the work force, these practices have to be curbed.

Structural change has become necessary to maintain decent lifestyles for the majority of the people over the longer term.

The colloquial way of stating the problem is to say that nations must learn to “live within their means”.

Bearing witness to the struggles that are taking place in Greece is one way to stiffen the resolve of other nations harboring thoughts of slacking off from fiscal discipline.

While the citizenry in Spain and Italy may be opposed to more austerity, there is little doubt that leadership in those two countries understands more pain must occur before a healthier public body can emerge again.

While we in North America are watching events in Europe unfold at what might seem a comfortable distance, the U.S. in particular should be careful about feeling too smug.

The U.S. is a nation where – on account of line-in-the-sand politics over such issues as raising taxes – reasonable measures to address funding shortfalls aren’t even being considered.


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