MARGARET WARNER: The economic news was grim: anemic job creation and higher unemployment in May. And it hit Wall Street hard, along with jitters over China and Europe.
The Dow Jones industrial average lost nearly 275 points to close at 12118, its worst drop in six months. The Nasdaq fell nearly 80 points to close at 2747. The dismal mood on the markets matched the picture painted in the Labor Department’s report.
The lines at job centers and fairs across the country are long and getting longer.
MAN: I put in so many applications online and in person, and it is like, oh, we just hired somebody, or it’s, well, we found somebody better qualified.
MARGARET WARNER: In fact, today’s report showed the economy created a net of just 69,000 jobs in May, only half of what was forecast. What’s more, far fewer jobs were created in March and April than first thought. The original numbers were revised down by 49,000.
All this drove the May unemployment rate up for the first time in 11 months to 8.2 percent, as more people went looking for jobs, but not finding them. And a new report in Europe today showed unemployment in the 17-member Eurozone hit a record 11 percent in March and April, as manufacturing slowed in Britain, Germany and France.
(CHEERING AND APPLAUSE)
MARGARET WARNER: President Obama, speaking in Minneapolis today, pointed to Europe’s troubles as a leading factor in the sluggish U.S. recovery.
BARACK OBAMA, President of the United States: We’ve had a crisis in Europe’s economy that is having an impact worldwide, and it’s starting to cast a shadow on our own as well. And all these factors have made it even more challenging to not just fully recover, but also lay the foundation for an economy that’s built to last over the long term.
MARGARET WARNER: But, appearing on CNBC, Republican presidential candidate Mitt Romney said blaming Europe won’t wash.
MITT ROMNEY (R), Presidential Candidate: If the president’s policies had worked, if he’d been able to get America back on track, why, we’d be looking at what happened in Europe as being a problem, but certainly not devastating. These numbers are devastating. You have got a lot of middle-income families that wonder whether the job they have got, they will be able to keep. This is very bad news for the American people.
MARGARET WARNER: The news may be especially bad for the more than five million who are long-term unemployed. The number of people out of work for more than six months grew by 300,000 in May, even as extended unemployment benefits begin to run out.
And we take a closer look now at what’s behind the weaker jobs picture.
For that, we turn to Daniel Gross, economics editor and writer for Yahoo! Finance, and Diane Swonk, chief economist at Mesirow Financial, based in Chicago.
Let me begin with Diane Swonk.
Fill out this report for us, this picture for us. What are the numbers behind the numbers?
DIANE SWONK, Senior Managing Director and Chief Economist, Mesirow Financial Holdings, Inc.: Well, it really was a dismal report. What we saw was a return of something that had been absent for a bit. And that was the gap between public and private sector employment.
We had sort of seen the state and local sector, many people thought the cuts were behind them and they wouldn’t be the headwind that they were last year at this time, when many teachers were being laid off.
Well, in this report, we saw teachers again being laid off. That counted for — more than half of all the layoffs in the public sector were teachers at both the state level and the local level. And then we started to see postal workers disappear at the federal level.
So the private sector was sort of carrying the economy in the past. And then we had seen finally the public sector headwinds begin to abate. That now has reversed again. And that was consistent with something else we saw this week, was GDP numbers showed that, in fact, instead of rising in the first quarter, state and local government spending contracted.
And so this is something we really worry about, along with construction spending, which showed construction spending today actually contracted at the public sector level again. So all those public sector projects are now being completed, and you’re losing employment from it as well.
MARGARET WARNER: And, Daniel Gross, what did today’s report tell you about where we are right now?
DANIEL GROSS, Economics Editor, Yahoo! Finance: Well, we have had for the last few years, which is a crisis in employment.
And Diane is right to note this dichotomy. The public sector has lopped off about a million jobs in the last two years, everyone from teachers to construction workers, bureaucrats, et cetera. And the private sector has added 4.3 million. There seem to be a lot of job openings. The Bureau of Labor Statistics publishes every month the JOLTS survey, which says how many jobs are open. There were about 3.7 million at the end of March. That’s the highest in several years.
And even though unemployment claims are falling, fewer people getting fired, they don’t — employers do not seem to be filling the open positions. And that could be because of a lack of skills. It could be because of geographical problems. There are a lot of jobs open in North Dakota, where very few people live. And a lot of it could simply be fear that the demand won’t be there to justify hiring new people.
MARGARET WARNER: Diane Swonk, why do you think employers aren’t hiring more or at a faster pace?
DIANE SWONK: Well, certainly, the economy is not growing fast enough to justify a lot faster pace.
But I also think we had some seasonal problems in the beginning of the year, where it was very warm in places like here in Chicago, and you could play golf and people went out and did a lot of things. They remodeled their homes, they did home improvements, repairs, and that moved some employment and pulled it forward.
But we’re much weaker than that would suggest in the giveback unemployment we see today. I think fear factor is one. In a low-growth economy, which you get after you have the kind of financial crisis we did, the low-growth subpar recovery, you add to that this fear factor, the uncertainty about everything from Europe, where exports are slowing, to China. China’s largest client is Europe.
And that now slowing means the stuff we sell to China, which is a lot of industrial equipment, manufacturing equipment, orders have begun to slow, all of that taking off some of the star in the U.S. economy from the manufacturing sector. It did hire, but not as fast a pace. It is slowing today.
But on the other side of it, there is this sort of unwillingness to unleash the cash corporations have on their balance sheets. They have got over $2 trillion in cash on their balance sheets. And they’re unwilling to make a bet on our future because they are both concerned about maybe an implosion in Europe causing ripple effects here in the U.S. in terms of another financial crisis, or, even more so, worried about rising taxes and the fiscal crisis we face, the fiscal cliff, they call it, at the end of this year, where both taxes are going to go up and expire — tax cuts expire and automatic spending cuts will go in and affect many industries as well.
Those spending cuts that are mandated are actually retroactive.
MARGARET WARNER: Daniel Gross, President Obama certainly cited the picture in Europe as a contributing factor today. How much of it do you think is international factors like the slowing growth in China, as Diane Swonk mentioned, and in Europe vs. domestic weakness?
DANIEL GROSS: Well, I think a fair amount of it is domestic weakness.
But things aren’t that weak domestically. We got construction spending numbers 6 percent higher than a year ago. We got car sales today 17 percent higher than a year ago. Retail sales are 6 or 7 percent higher than they were a year ago.
The underlying demand is growing. I think it has a lot to do with fear and this sense of being shell-shocked from 2008-2009, when companies found that demand evaporated and they were left with far too many employees. If you have a service business, which most of businesses in this country are, your biggest input, your biggest cost is labor.
And so if you are caught with a lot of employees at a time when you don’t have the business, your profits quickly turn to losses. And I think employers to a degree are kind of shell-shocked by what they went through in ’08 and ’09 and as a result very hesitant to get out ahead of demand.
MARGARET WARNER: So are you saying you think this is in part, really a significant part, psychology-driven; it’s not just the numbers or what they see out there as growth?
DANIEL GROSS: Well, I think, look, the economy — psychology matters a great deal in investment. It’s all about fear and greed and expectations, sentiment.
We always report these numbers on consumer confidence and how people are feeling. And for people in lots of businesses, that stuff really matters. If you are a car manufacturer, you’re going to look at how many cars you sold the last few months and how much inventory you have, but you are also going to look at business confidence and consumer confidence to decide, should I add another shift, should I employee more people, should I make more cars?
So I think confidence does have a great deal to do with it. I don’t think it has an awful lot to do with regulation or even taxes. If you are a dry cleaner or a restaurant, your most immediate problem is, are there enough people coming through my door next week to justify adding another person, or am I foregoing business by not bringing on additional staff?
MARGARET WARNER: So, Diane Swonk, did you see any bright spots in these numbers?
DIANE SWONK: Well, the ongoing bright spot has been the hiring in the health care industry. And so we did see that continue to show incredibly strong gains.
The health care industry still adding to numbers. And with the ’47, 1947 baby boomers now retiring and consuming more health care, that will be something that you will see continue, although it is interesting. Our consumption of health care and services has now become discretionary, and it’s actually growing at a slower pace than overall consumption, which is something we didn’t see in the past.
And that’s because I think of the tradeoffs people are making. The other silver lining is the weakness that markets are reacting to globally have brought down oil prices quite significantly. It’s trumped any saber-rattling in Iran, and that’s very important. Prices at the pump have been falling over the last month quite dramatically, and they are going to continue to fall.
And that’s like a de facto tax cut to consumers and will help to buoy consumer spending, even as employment remains somewhat tepid over the summer. And I think that’s a very important thing in terms of keeping the momentum going and allowing us to re-accelerate by the end of the year. Certainly, we hope that happens. This has become deja vu. The problems we are facing are the same problems we faced for the last two years, where midyear, we hit a crisis either from Europe or from our own fiscal situation — the debt debacle of last summer comes to mind — combined, and that causes a pause in economic activity.
When you are already going in a traffic jam and sort of, you just got past an accident, you accelerate a bit and then you see another accident, and everybody slows down, we just never hit a cruise control speed in this economy.
MARGARET WARNER: None of this good news for the long-term unemployed.
Well, Diane Swonk, thank you very much, and Daniel Gross.