Economic dry rot

US jobs: The US loss of 6.9 million jobs in this recession, easily a post-war record, may signal long-term economic problems. Aside from the impact of the global downturn, the exceptionally weak labour market may reflect a secular deterioration of America's once mighty capital position. A narrowing of the gap with wages and living standards elsewhere could follow.

The loss of 216,000 nonfarm jobs in August was not particularly alarming, although the unemployment rate notched a new cyclical high at 9.7 per cent. However when matched against strong Institute of Supply Management data and other output indicators, it suggests the unemployment trend is significantly weaker than the economic situation would normally suggest.

 

A robust 6.9 per cent productivity gain in the second quarter reinforces the impression that the US is losing more jobs than warranted by the economic downturn.

So does a historical comparison: 6.9 million jobs have been lost in this recession, compared with no more than 2.1 million in any recession since World War II, while the unemployment rate has risen by 5.3 percentage points, a postwar record rise.

That hints at some secular weakness - a long term decline in US competitiveness. One candidate is a reduced advantage in terms of the availability and cost of capital. Big US deficits and the associated heavy borrowing, a shift in wealth creation to other countries and other factors have, in recent decades, made capital relatively less plentiful and more expensive in the US as against low-wage economies.

If the capital advantage of the US has lessened, that ought to imply that the gap between the wages traditionally enjoyed in the US and in emerging markets will narrow as real wages in developing economies catch up - and perhaps also through declines in US wages.

Like some grand antebellum southern mansion, the US economy is showing resilience in the face of its latest woes. But the impressive edifice could be hiding signs of long-term deterioration - one being the effect on American jobs of 20 years of capital outflows.