We were afraid this shoe might drop, and drop it did last month, with a thud, right in the middle of the US job market, which lost 4,000 jobs last month, the first such loss in four years.
A central question surrounding today's jobs report was whether it would provide clear evidence of a contagion effect from financial markets. Are the bursting housing bubble, the credit crunch, and recent financial market turmoil having a negative impact on the job market?
The answer is an unequivocal "yes." The fingerprints of these problems are all over today's jobs report. Several factors point to the beginning of a new and troublesome trend in the job market: negative revisions of earlier months' data, widespread losses and slowdowns across industries, and weak labor force growth.
True, the unemployment rate held steady at a relatively low 4.6%. But that was entirely due to a large monthly fall off--down 340,000--in the labor force (those who leave the labor force are not counted among the unemployed). In other words, the unemployment rate was unchanged due to fewer job seekers, not more jobs. Had the labor force leavers instead been unemployed, the rate would have jumped to 4.85%.
Moreover, the credit contagion and housing bust are unlikely to disappear soon. To the contrary, at this point, we need to worry about a viscious cycle wherein slower job growth eventually leads to slower wage and income growth, less consumer demand, reinforcing further weakness in hiring.
Thus, now is the time to start exploring ways to regenerate growth. The Fed is likely to cut interest rates at their meeting later this month, and Congress might begin assembling a jobs package to keep a slowing economy from grinding into recession. It would also make sense to beef up our Unemployment Insurance program, making sure it's ready for a bunch of new customers.
The deteriorating job market is a stark reminder that we need economic policy based on productive investment and the creation of good jobs. The other kind of economic policy--the type that relies on asset bubbles in the housing or stock market--has demonstrably failed.