As U.S. debt farce continues, the job picture adds to worries
Considering how vital, and elusive, confidence can be, it has been remarkable to watch so many American politicians behave as if faith in the U.S. economy can be taken for granted
Whatever your views are on the debt ceiling drama that has played out on the Potomac, it’s hard to see how the consumers and businesses that were already questioning whether the world’s biggest economy was on the right track could be feeling any better these days.
Their fragile psychology could take another blow on Friday, when the U.S. Labour Department reports employment data for July. Even with a political agreement that averts a default and satisfies credit-rating agencies, it’s entirely possible that a disappointing jobs report for a third consecutive month would wipe out any upturn in sentiment.
Analysts estimate that U.S. employers added about 90,000 workers during the month – more than twice the total gain in the previous two months combined and enough to hold the jobless rate at 9.2 per cent, but well short of what would be needed to push the rate lower.
That means it is unlikely that consumer spending, which accounts for about 70 per cent of the U.S. economy, will take off soon. Millions are still out of work, half of the unemployed have been without jobs for more than six months, and those with jobs are trying to trim their debt and are hesitant to spend. Much like in 2009, when the U.S. was struggling to get out of the Great Recession, this is fuelling a vicious circle: Consumers won’t spend, so companies are too nervous to hire even though many are flush with cash; because companies aren’t hiring, consumers have less money and confidence to spend, and so on.
The fear and loathing in Washington – mostly loathing – is exacerbating matters.
“We’re still of the view we’re going to probably get a [credit] downgrade as opposed to the sort of Armageddon of a default, but even in that case, all these headlines can’t help but hurt confidence,” Peter Buchanan, an economist with CIBC World Markets, said in an interview last week.
Still, Mr. Buchanan is among the more optimistic, anticipating 125,000 new U.S. jobs for the month, in part because of a lighter-than-normal retooling schedule for some of the biggest auto manufacturers and, consequently, fewer layoffs in that sector.
On the other side of the spectrum, Benjamin Reitzes of BMO Nesbitt Burns said that even as temporary headaches ease, like the impact of the Japanese earthquake on North American supply chains and high gasoline prices, the steady stream of discouraging news from Washington – and, for that matter, Europe – has weakened the business case for aggressive hiring. Mr. Reitzes is looking for just 60,000 net new U.S. jobs.
“It’s certainly a possibility, and I think a strong one, that businesses were just very reluctant to hire over the past few weeks out of uncertainty about what’s going to happen with the debt ceiling, and the European situation before that,” Mr. Reitzes said. “People likely weren’t as willing to hire as they otherwise would have been.”
Given that U.S. growth in the second quarter came in at a meagre annual rate of 1.3 per cent – in no small part because consumer purchasing isn’t growing at all – it’s easy to see why President Barack Obama and Federal Reserve Board chairman Ben Bernanke have warned that the slightest bit of added uncertainty could spell disaster. (Indeed, for Mr. Obama, disaster could strike twice: First, with a slip back toward another recession that the current slash-and-burn climate in Washington won’t let him counter with fresh stimulus spending, and second, next fall when he runs on his economic record.)
With years of federal cuts looming, hiring in the United States will depend on the private sector gaining confidence in the recovery – and being persuaded that politicians understand they cannot throw up unnecessary obstacles in its path.
Canada, which also reports July employment numbers on Friday, has had a smoother turnaround than its southern neighbour. The labour market has recouped all of the jobs lost in the recession, and there are indications that the quality of new work is improving. In June, the economy produced more than 28,000 jobs, and the average for the first six months of 2011 was 32,000, not spectacular but decent for a country of Canada’s size.
As an exporting nation, though, Canada can only grow so much when its main trading partners are in the grip of uncertainty and anxiety. Economists estimate that there were 15,000 workers added in July, and the jobless rate stayed at 7.4 per cent. That’s the lowest unemployment rate in 2½ years, but still higher than pre-recession levels, and it is unlikely to shrink significantly in the coming months.
The Bank of Canada’s summer survey of businesses across the country found most plan to add staff in the second half of 2011. But it was conducted before the U.S. and European crises worsened, and long before last Friday’s U.S. growth figures suggested the soft patch in our principal export market will last longer than initially thought.
And if the farce in Washington keeps pushing the U.S. dollar down, the lofty Canadian currency – arguably the No. 1 threat to the prospects of any Canadian business that sells to the U.S. – could break its modern record of $1.10 (U.S.).
“A lot of companies will be putting [hiring] decisions off until we get a clearer view of what lies ahead,” said Jay Myers, president and CEO of Canadian Manufacturers & Exporters, citing a “cost squeeze” from the higher currency and a recent decline in orders from the United States. “Companies under the gun in terms of cash flow are not going to be out hiring a lot of new people. So it’s going to slow the process down, and let’s hope it’s just on a temporary basis.’’
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