The Meltdown Lowdown, No. 20

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Dean Baker
The American Prospect Online, September 4, 2008

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This week in economic news: The ostensibly anti-earmark McCain picks earmark-loving Palin, employment and nonresidential construction are down, and oil prices plunge.

Earmark Fighter McCain Nabs Earmark Queen for VP

Sen. McCain has made a major cause out of fighting earmarks. He famously opposed the spending of $1 million (0.00003 percent of the federal budget) to pay for a Woodstock museum. But McCain's staunch opposition to earmarks makes his selection of Gov. Palin as his running mate somewhat of a surprise.

According to a Washington Post article, Gov. Palin was somewhat of an earmark queen as mayor of the tiny town of Wasilla, Alaska. The article reports that she hired a lobbyist who managed to secure $27 million in federal funds for Wasilla (the cost of 27 Woodstock museums) in her four years as mayor. Her list of pet projects included $450,000 in federal dollars for an agricultural processing center, $500,000 for a community transit center, and $1 million for an emergency communications center -- all of which McCain listed over the years in his annual "pork lists."

With a population of 6,700 this comes to more than $4,000 per person, or $1,000 per person for each of the four years that she was mayor. Now that is real money. If every mayor in America were as successful as Gov. Palin in securing earmarks, the tab would come to $300 billion a year, or 10 percent of the budget. Now that would be something to get upset about.


August Employment Numbers: Likely More Bad News

The second-to-last jobs report before the election comes out tomorrow. It is likely to show that the economy is still shedding jobs, and, by my best guess, doing so at a somewhat more rapid pace than during prior months. The economy has been losing close to 70,000 jobs a month since January. The sharp jump in unemployment claims last month (the highest weekly levels since immediately after the Sept. 11 attacks) indicates that the rate of job loss has increased. My bet is that we are looking at a loss of 150,000 jobs in August.

The weakening employment picture certainly will not help wage growth. Nominal wage growth (that is, not adjusted for inflation) has been weakening along with the labor market -- the annual pace of nominal wage growth is now close to 3 percent, even as the rate of inflation has soared above 5 percent. Millions of workers are also working shorter workweeks: The number of part-time workers who desire full-time employment has risen by more than 1.5 million since its low point in 2006. Fewer hours, at lower real wages, translates into rapid declines in purchasing power.

The only good news for workers in this story is that gasoline prices have been falling for the last month. Gas at $3.65 a gallon would not ordinarily be viewed as goods news, but after several months of prices over $4 a gallon, it does provide some relief.

The September jobs report, which will be released on Oct. 3, is not likely to look any better. Back in the summer, the airlines all announced large-scale layoffs that would go into effect after Labor Day. Those lost jobs, together with continued weakness in manufacturing, retail, and construction (see below), suggest the total number of available jobs will continue to decline.

It's also worth noting that preliminary revisions to the jobs data over the prior year will be released with the September jobs report. My bet is that the revision knocks employment levels down by 300,000 jobs, giving President Bush secure possession of last place among post-World War II presidents in the rate of job creation. (Bush I is second-to-last.)


Nonresidential Construction Turns Negative, How About Third-Quarter GDP?

The economy is clearly in bad shape right now, and that will be true whether the third-quarter gross domestic product data show small positive numbers or small negatives. But, political spin being what it is, the actual sign is likely to make a big difference since the release will come out the Thursday before the election.

As I have written previously, I am betting that the number will be negative. Consumption is the bulk of the story, accounting for 70 percent of GDP (government is 20 percent, business investment is approximately 10 percent, housing is about 5 percent, and net exports are a negative 5 percent). Consumption expenditures fell in July after also dropping in June. With the effect of the tax rebates waning and the economy continuing to shed jobs, it is likely that consumption will fall in August and September as well.

The other components of GDP don't look very good either. State and local governments are likely to be cutting back spending under the pressure of budget deficits. Federal spending will also be near flat or negative following two quarters of rapid growth. Net exports and inventories are less clear.

This leaves construction. The housing sector is continuing to contract, and nonresidential construction also appears to be headed downward. A boom in nonresidential construction that followed the collapse of the housing bubble in 2006 appears to be petering out. Private nonresidential construction fell 0.7 percent in July before adjusting for inflation, which translates into a decline of more than 1 percent after adjusting for inflation. Adding the projected changes in GDP components together, I get a negative number for third-quarter GDP, but stay tuned.


Oil Prices Plunge

Oil prices have fallen sharply in the last month, at one point this week falling as low as $105 a barrel. This drop suggest that the oil fundamentalists, who insisted that the jump in price to $145 a barrel was driven by the fundamentals of supply and demand, were further from the truth than members of the speculative school, who felt that the price increases had a substantial speculative component.

As someone who had one foot firmly in the speculative camp, it seems hard to reconcile recent price movements with a straight supply-and-demand story about recent increases in oil prices. Do we know of any vast new supplies of oil that have been put on the market in recent weeks? They certainly haven't made the papers.

As far as demand, the economy is weakening, but the general direction for the world economy is still upward. Surely there is more demand for oil at any given price in September than in June simply because the world economy is larger.

This looks like a straightforward story of overshooting. When oil prices were rising, speculators bought oil on the expectation that the price would continue to rise. Now that speculators no longer have such expectations, the price is returning to a price based on fundamentals, although there could be overshooting on the downside.

Anyhow, the price of oil followed pretty much the path I would have guessed. (No, I couldn't have told you the timing.) I suspect that prices will bounce back up to $115 to $120 in the next few weeks, although a bad hurricane could hasten the process.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.