Let’s hope that the government’s latest report on gross domestic product (GDP) in the second quarter of 2010 isn’t a preview of what’s in store for the U.S. economy for the foreseeable future.  Last Friday, Washington released the first of two scheduled revisions to the initial second quarter report, and a detailed look at this most recent gauge of American economic growth points to a future that combines the worst of the bubble era with the worst of the ongoing recession.

As in the bubble years of the last decade, the new GDP report shows that growth is springing largely from decidedly dicey sources, like government spending and personal consumption.  But the new report also shows that the results don’t even add up to meaningful bubble-ized growth anymore, but near-stagnation.  In other words, the gimmicks used by Washington and Wall Street to prop up economic activity may be running out of steam.  

The headline news made by the latest GDP numbers was that second quarter growth was actually 1.6 percent, not the 2.4 percent originally reported.  (All figures here will be presented on an annualized, inflation-adjusted basis unless otherwise specified.)  The clear implication:  Despite trillions of dollars worth of stimulus injected into the economy by government since summer, 2007, growth had practically ground to a halt.

That news is bad enough.  But the developments behind the headline figure expose an even grimmer picture.  The biggest differences between the first two growth estimates for the second quarter resulted from a somewhat higher level of private consumption (which added to growth), and much worse figures for America’s trade deficit, and for business inventories (which together swamped the consumption effect).  

That is to say, most of the improvement found in the latest report on the second quarter came from a growth engine that’s been way too important in recent years (private consumption).  And most of the deterioration revealed came from a private-sector source
that seems to be returning to historical norms after wild, crisis-induced fluctuations (inventory building) and from a private-sector source that directly reflects the nation’s international competitiveness (the trade deficit).

The same troubling pattern is evident from examining the differences between the final 3.7 percent growth figure reported for the first quarter of 2010, and the latest 1.6 percent second-quarter figure.  The two biggest props for economic growth during that period were government spending and housing – two sectors of the economies that post-bubble Americans should be extremely wary of, largely because they are thoroughly politicized and therefore have little to do with real economic fundamentals.  

The two biggest drags on growth during this period were those steadying inventory levels, and the trade deficit (both of which overwhelmingly reflect genuine private-sector developments).

The latest second-quarter figures themselves also portray an economy resting on terribly shaky foundations.  Three of the top five engines of growth were private consumption (#2), government spending (#3), and housing (#5).  Business investment was the leading growth source, which looks encouraging.  But since the recession deepened, it’s been almost as volatile as inventory buildups (and draw-downs), which came in at #4, and hence may be transient, too.  

Overwhelming all these trends, however, was the contractionary effect of a soaring trade deficit, which drained more than two times as much output from the United States as business investment supported.  In fact, the 3.37 percentage points by which the second-quarter trade deficit shrank the economy was more than twice as high at the overall 1.6 percent growth rate.

President Obama has declared many times that the nation must “build a new foundation for lasting prosperity.”  As he said in his last State of the Union address, during the last decade, “prosperity was built on a housing bubble and financial speculation.”  But to date he has offered little more than a deficit-spending model that clearly has failed.  And he appears strongly opposed to the smart, tough trade policy changes that just as clearly can produce real, private-sector growth without increasing the economy’s already dangerous debt burden.  Fortunately for him – but not the national interest – his political opponents seem equally clueless about how to restore America’s economic health.


 

Germany’s second quarter growth statistics now have been officially published, and they powerfully reinforce the messages of my August 12 posting:  First, the only way in which changing trade flows can boost a country’s growth and employment on net is by improving its trade balance.  In Germany’s case, this has meant boosting an already considerable trade surplus.  Second, improving the trade balance enables an economy to expand even if its government deficits are falling. (  http://americaneconomicalert.org/blogger_home.asp?Prod_ID=37#3666).  

German growth of 2.2 percent was not only its best performance since unification 20 years ago.  It beat the consensus forecast by 10 percent!  

On the surface, the second quarter U.S. growth rate of 2.4 percent looks better (although it’s likely to be revised downward considerably at the end of this week).  But the United States has been producing these uninspiring figures despite ongoing government borrowing that keeps adding to America’s already dangerous debt levels.  Germany has done better even though Berlin has been cutting  budget deficits.

The contrast in job creation is even more striking.  Germany’s average second quarter unemployment rate of 7.67 percent this year is more than seven percent lower than the 8.27 percent second quarter rate for last year.  In the United States, the comparable figures are 9.27 percent last year and 9.57 percent this year – a worsening performance despite growing deficit spending.

The key?  As the news reports indicate, Germany’s private consumption did rise in the second quarter – by 0.6 percent.  But that performance accounted for only 13.64 percent of Germany’s second-quarter growth.  Government spending rose, too – but only by 0.1 percent, accounting for 4.55 percent of that growth.  

The lion’s share of Germany’s growth came from its continuing trade surplus (which contributed 36.4 percent of growth) and investment (whose contribution was the same, and much of which was undoubtedly export-oriented, like the rest of Germany’s economy).  In fact, from the second quarter of 2009 to the second quarter of 2010, Germany’s trade surplus rose 16.72 percent.

Yet in a lesson that it’s especially important for American leaders to learn, Germany’s trade balance improvement did not stem simply from export expansion.  Yes, overseas sales rose 25.41 percent on a quarterly basis from 2009 to 2010.   But imports (for which data is available only for April and May), grew more slowly – by 24.74 percent.  In the United States, the pattern continues to be exactly the reverse.  

Therefore, achieving a sustainable, private sector-led U.S. recovery (as opposed to  concocting more debt-fueled, and thus unsustainable economic activity), requires controlling America’s spiraling imports as well as promoting exports.  The implications keep staring President Obama right in the face, and he keeps right on ignoring them.  Talk about a bearish leading indicator!

 

Everyone paying any attention at all to the U.S. economy has noticed that yields on U.S. government debt – and therefore America’s borrowing costs – keep setting record lows despite soaring federal budget deficits and dreary (at best) national growth prospects.  One stunning but consistent exception – mainstream analysts of U.S.-China relations.

Thus in his August 5 Financial Times column, the normally competent David Pilling wrote of an agonizing dilemma the United States supposedly faces with China.  Either America can safeguard its national security by treating prospective Chinese investments warily -- and risk losing "a wall of Chinese money" it presumably needs desperately to maintain its living standards and restore its competitiveness.  Or the United States can welcome most such investments more enthusiastically and risk incurring real threats to its security.

But no such dilemma exists at all, or is even in sight.  As the Treasury bill market is making glaringly obvious, Washington is having no trouble accessing any capital, foreign or domestic.  What if greater official vigilance produces a complete Chinese lending cut-off – almost inconceivable, since it would much further devalue Bejing's existing dollar-denominated holdings, and probably cut off a vital export market?  The still slumping American economy creates ample (though of course not limitless) scope for the government to print still more money without triggering dangerous inflation.

The nation's crying need, then, is not capital per se, and certainly not capital from a country posing significant actual and potential security threats – as Pilling recognizes.  Rather, America’s crying need is new government policies that will encourage the investment of abundant capital in a productive manner.  In fact, if accompanied by an overhaul of offshoring-focused U.S. trade policies, the sustainable private sector growth and employment generated by such investment would eventually strengthen American security, too.  For it would slash the nation's debt-creating trade deficits and create the wherewithal for even greater financial independence.  

Tragically, the strong rebound in the U.S. trade deficit indicates that Washington is promoting exactly the opposite – more spending, more substitution of foreign for domestically produced goods, and therefore more borrowing from places like China that needlessly keep the nation living on borrowed economic time.  




 

In case you were worried that in order to become a reporter for the Wall Street Journal and then move over to AOL’s Daily Finance you’d need some understanding of how national trade balances affect economic growth and job creation, relax.  Vivesh Kumar’s writings show that you don’t need to know anything about these subjects at all.

In his August 11 posting for AOL, Kumar wrote that U.S. leaders desperately searching for genuine recovery strategies should look to the example of Germany.  That country’s exports, he noted, have been surging for the last two months, and its unemployment has dropped to pre-financial crisis levels.  Meanwhile, Germany’s GDP growth is projected to be two percent for the last quarter – the highest level since Germany’s reunification in 1990.  That figure, of course, is no great shakes by recent U.S. standards, even since the crisis.  But Germany is now accomplishing these goals while cutting its budget deficit.

Unfortunately, Kumar’s understanding of how trade flows affect these metrics is as incomplete as President Obama’s.  In fact, Germany’s excellent performance on all these fronts stems not simply from boosting exports, but from widening its already impressive trade surplus.  In fact, improving a trade balance is the only way that changing trade levels can contribute to economic growth on net.   Simply increasing exports in and of itself accomplishes zero.

Specifically, through May, on a year-to-date basis, Germany's global trade surplus is up 28.51 percent. I don’t yet have the Germany global totals through June, but yesterday’s U.S. June trade figures show that Germany’s merchandise trade surplus with the United States is up 31.34 percent year-on-year.  

At least as interesting:  According to the Financial Times on August 11, “the most striking thing about the [German trade] figures is how little of the surplus is racked up within the eurozone.”  

The implications are obvious:  German trade policies are working to strengthen the economic fundamentals of Germany and its fellow eurozone members.   U.S. trade policies remain focused on enabling excessive domestic consumption and borrowing, keep ignoring the need to jumpstart production.  And these perverse priorities – which led directly to the ongoing economic and financial crisis – show few signs of change even though slowing growth and rising economic anxiety are making all too clear that the string on this excuse for a strategy is rapidly running out.


 

...CNN pundit Fareed Zakaria’s interview with former Treasury Secretary Robert Rubin definitely had an umistakable “deaf leading the blind” air to it.  Both, of course, remain staunch cheerleaders for the failed U.S. globalization policies largely responsible for nearly two decades of whopping international economic imbalances and the financial meltdown and Great Recession they produced.  

But here’s what’s even more disturbing about Rubin’s claims that the Clinton years were a "remarkable period” economically and that the president “was terrific on economic policy” – which of course went unchallenged by the host.  It was bad enough learning that, for nearly a decade, America’s economy was being run by someone who couldn’t recognize a massive stock market and technology bubble in the making.  It’s even worse to learn that he can’t recognize this bubble’s inflation after the fact, either.

...This eye-opening story was completely buried in the Financial Times August 4 – the French government is tightening “its grip on partly state-owned companies to ensure they maintain factories and jobs in France.”  The article explains that the companies’ investment plans must ensure “that a sufficient share of the value-added aspect in manufacturing processes is retained in France.”  Not only investment decisions, but procurement and supply chain policies will be assessed.  Pentagon please take note: One of these companies is EADS, which wants to build your Air Force’s next tanker.  

And before the snickering begins about learning economic policy lessons from Paris, consider this – France is growing slowly at best, but it’s also reduced its global trade deficit by nearly 11 percent over the last year, and nearly doubled its surplus with the United States during the same period.  So unlike America, France at least isn’t racking up new debts at an ever-faster pace.

By the way – these French policies seem flagrantly protectionist and WTO-illegal.  Where are the howls of protest from Washington?  And where’s the outrage from whiny Canada, which lost no time blasting the limited and completely legal Buy American provisions in the Obama stimulus bill last year?

...I was shocked, just shocked, to read the July 22 Wall Street Journal report that China was stonewalling Washington’s efforts to investigate the tainted heparin scandal.  In 2007 and 2008, you may recall, shipments of the contaminated blood-thinner from the PRC were linked to the deaths of at least 81 Americans.  But U.S. Food and Drug Administration officials told House Republican investigators this June that their agency had been “severely hampered” by a lack of Chinese cooperation in finding the culprits.  In fact, Beijing told a U.S. official two years before that no Chinese investigation was being undertaken, despite repeated American requests for help.  

Let’s at least hope that this episode finally discredits the conviction held even by many U.S. trade policy and China critics that Americans can be protected from dangerous Chinese products by securing more Chinese cooperation and specifically by more U.S. inspections of Chinese factories.  But let’s also hope that more Americans don’t have to suffer harm and even death before Washington tackles the problem with stronger, more sweeping measures.

...Finally, this laugh-out-loud item from Washington Post Writers Group columnist Edward Schumacher-Matos, a pillar of the pro-amnesty approach to immigration policy: “Nearly 5 percent of the nation’s workforce is made up of unauthorized immigrants.  Large parts of agriculture, construction, and the leisure and hospitality industries would risk collapse if workers were deported.”

The notion that illegal immigrants “take jobs Americans won’t do” was belied even in more prosperous (or at least bubble-ized) days by wage figures showing clearly that pay in these allegedly labor-short sectors kept falling.  At a time of deep, painful recession, astronomical unemployment, and major funding pressures on unemployment compensation, it’s less than ludicrous.  

And I guess the author simply forgot that the  U.S. construction industry collapsed quite completely two years ago, despite its abundance of illegal workers.
 

If Treasury Secretary Timothy F. Geithner didn’t exist, someone would have to invent him.  Between his Wall Street-dominated worldview and his breathtaking rise up the power- elite ladder, he’s a veritable poster boy for elitist indifference to Main Street’s ever-worsening plight.  Best of all, he’s a certified tax scofflaw!  

But in some ways, what’s most outrageous about his New York Times op-ed article last weekend touting the onset of recovery is not its overall polyanna-ish thrust, but its flagrant misrepresentation of America’s trade performance – both coming and going.

According to Geithner, “Even the surge in imports [for the second quarter of this year], which lowered the rate of increase of G.D.P., actually reflects healthy and growing American demand,” while “Exports are booming because American companies are very competitive and lead the world in many high-tech industries.”

But the import surge can’t possibly reflect healthy demand if it’s being accompanied by a surge in the trade deficit – which happens to be up nearly 38 percent so far this year from last year’s totals.  The widening gap between what the nation sells and buys from abroad makes clear that about the only healthily growing part of the American economy is debt – which is still dangerously abundant.

Exports are indeed up 17.70 percent between the first five months of 20101 and the first five months of 2009 – though if this qualifies as a boom, how should we describe imports, which have increased 21.41 percent year-on-year?  

Worse, the supposed boom in high tech exports Geithner claims is visible everywhere except in the data.  These U.S. overseas sales have risen only by 12.08 percent over last year’s level’s.  As a result, high tech exports comprise only 14.58 percent of total U.S. exports so far this year – down from 15.31 percent in 2009 and way down from 21.34 percent ten years ago.  

In fact, manufactures exports overall represent only 47.19 percent of total U.S. exports this year – up slightly from 46.72 percent in 2009, but far below the 58.73 percent achieved in 2000.  Some export boom.  And some recipe for sustainable prosperity for a first-world economy.


 

This morning’s new government report on economic growth makes stunningly clearer than ever  that trade is strongly undermining economic growth -- which indicates our current trade policies are broken.

The report not only provides the government’s first estimate of growth for the second quarter of 2010.  It also revises all the figures for the 2006-2009 period.  And trade flows are unmistakably placed on the hot seat.  

Here, for example, is the relevant portion of the report’s analysis of the second quarter growth figures: “The deceleration in real GDP [gross domestic product] in the second quarter primarily reflected an acceleration in imports and a deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending."

Even worse, this paragraph reveals that two of the biggest trends that propped up growth – i.e., which partly offset the damage done by higher imports and slower inventory building – were more home-building and more government spending.  Haven’t we seen this disaster movie before?  

As for the 2006-09 revisions – all downward, incidentally – the GDP report found that “For 2007, the largest contributors to real growth were a downward revision to PCE [personal consumption expenditures], an upward revision to imports, and a downward revision to state and local government; spending; these revisions were partly offset by upward revisions to inventory investment, to exports, and to nonresidential fixed investment.”

For 2008, the report continues, “the largest contributors to the revision were a downward revision to nonresidential fixed investment, a downward revision to inventory investment, and an upward revision to imports; these revisions were partly offset by an upward revision to exports...."

For 2009, the largest contributors to the revision were downward revisions to PCE, to state and local government spending, and to residential fixed investment; these revisions were partly offset by upward revisions to inventory investment and to nonresidential fixed investment, and a downward revision to imports....”

In other words, growth from 2006 to 2008 was lower than previously calculated, and a worse performance from international trade was a major contributor.  Trade’s role turned around in 2009 – but only because growth was dragged down so far during the worst (so far) stages of the economic and financial crisis that the crippled U.S. economy pulled in even fewer products from abroad than originally thought.

The specific numbers involved are pretty jaw-dropping.  The second quarter 2010 figures (such quarterly figures are always revised twice more before they’re final), show that the U.S. economy grew by 2.40 percent on an annualized basis after adjusting for inflation.  But trade lowered that figure by an enormous 2.78 percentage points – meaning that even had exports and imports merely matched each other for the second three months of this year, the annualized quarterly growth rate would have been a truly impressive 5.18 percent.  

By contrast, the revised first quarter figures showed that trade flows subtracted 0.31 percentage points from the 3.7 percent overall growth figure -- a bit less than first reported.  The big change came on the import side. Americans’ purchases of foreign goods and services alone lowered growth by 1.61 percentage points in the first quarter, but that figure soared to four percentage points in the second.

And what of exports, which President Obama believes can double in five years?  Their contribution to overall growth actually fell slightly – from 1.30 percentage points to 1.22.  In other words, not a good sign for the President’s plans.

The message from the 2006-2009 revisions is similar.  Trade had the same effect on 2006 growth as first reported – and the overall growth rate didn’t change, either.  But in 2007, and 2008, trade flows added a bit less to growth than originally calculated – 0.06 percentage points and 0.02 percentage points, respectively.  And the overall growth for those years has been reduced, too – from 2.1 percent to 1.9 percent for 2007, and 0.4 percent to plain zero for 2008.  

A final, and crucial, point:  The downward growth revisions for 2006 and 2007 growth strengthen a conclusion that the U.S. Business and Industry Council has been making for more than a decade.  Before the collapse of the subprime mortgage market in 2007, the Council had been insisting that what virtually all other observers were calling a solid expansion was really a bubble.  By numerous major measures like the money supply, the federal funds rate, and the massive return of federal deficit spending, record stimulus was being poured into the U.S. economy.  But even the old recorded growth rates were ho-hum at best – clearly indicating that something was drastically wrong with the nation’s engines of wealth creation.

The latest, lowered growth numbers for that period reveal that the economy was even sicker than we realized, and that recovery will be that much more difficult.  Given the destructive role being played by U.S. trade flows, revamping the failed policies behind them should be a much higher priority in Washington.
 

Today’s final government-issued revision of America’s economic growth performance made me think of the current Staples ad campaign.  But rather than “Wow! That’s a really low price!” the only appropriate reaction is “Wow!  That’s a really lousy report!”  And it’s something President Obama really should read on his way up to Toronto for the weekend summit of the G-20 – the world’s 20 biggest economies.

The headline figure was bad enough – inflation-adjusted gross domestic product (GDP) growth for the first quarter of this year was really 2.7 percent at an annualized rate, not the 3.0 percent previously estimated or the 3.2 percent figure published in the first estimate back in late April.  This spotlights what’s really worrisome about the American economy and the administration’s recovery strategy – it’s not that after an estimated $12 trillion of government stimulus, unemployment remains at stratospheric levels.  That’s the symptom.  It’s that the growth bang per buck of this borrowed federal money – the growth needed to create sustainable private sector jobs to begin with –  has been pathetic.

And here’s the G-20 tie-in – lots of this dismal performance stems directly or indirectly from America’s mismanaged international trade policies.  The nation’s trade flows subtracted 0.82 percentage points from growth in the first quarter.  The previous estimate was 0.66 percentage points.  

In other words, America’s trade performance is reducing the nation’s growth and undermining its prosperity, not expanding it.  The numbers reveal the enormous amounts of stimulus benefits that literally are leaking overseas, to spur growth and job creation abroad.  Indeed, this current 0.82 percent drag on growth is more than three times bigger than the much better-publicized drag currently being exerted by the moribund housing sector, and nearly twice the even better-publicized drag being exerted by increasingly insolvent state and local governments – which, unlike Washington, can’t print money.

The new economic figures should be teaching President Obama and his economic team another crucial lesson – their goal of doubling exports per se won’t create a single penny’s worth of new growth or a single new job.  Nor will the almost universally supported objective of “trade expansion.”  Only increasing net exports – i.e., increasing exports faster than imports, and thus reducing America’s chronic trade deficit – can accomplish those goals.

According to the previous GDP estimate, exports added 0.82 percentage points to growth in the first quarter, while imports subtracted 1.48 points.  The final figure released this morning pegs the export contribution to growth at 1.27 percentage points – more than the previous estimate.  But imports subtracted a much greater 2.09 percentage points – also more than the previous estimate.  So despite both the export growth and trade expansion of the first quarter, trade’s effect on the economy was negative – exactly the opposite of what’s needed.

The imperative of growing by reducing the trade deficit becomes especially clear after examining some of the other GDP data.  The increase in personal consumption added 2.13 percentage points to growth rather than the 2.42 percent previously estimated.  That’s good for the country’s long-term economic health, because over-consumption (and the consequent under-production) ultimately caused the financial crisis and deep recession.  But the way the GDP is calculated, it’s bad for near-term growth.  And even with this dip, consumption stands at 70.69 percent of economic activity.  If that figure holds up for the year, it would exceed the levels hit at the height of the bubble!

Will America’s businesses – and especially its immensely profitable big businesses – fill the growth gap?  Doubtful.  The previous GDP estimate put business spending’s contribution to growth at 0.29 percentage points.  This final revision: 0.21 percentage points.  Inventory restocking by businesses continued, adding 1.88 percentage points to growth instead of the 1.65 percentage points previously thought.  But this rate was only half that in the fourth quarter of 2009, and will continue slowing now that the recovery from the early 2009 bust is finishing up.  The obvious implication:  For all the demand ostensibly being created for American products abroad, it’s not nearly enough to replace the final demand still being lost at home.  And too much of the latter is being filled by imports anyway.

So the President faces a clear choice in Toronto:  He can stay on his current course, and continue believing despite all the evidence that prosperity can be created by the equivalent of pouring ever more water into a massively punctured vessel.  Or he can change a losing game, and start plugging the leak with trade policies aimed at reducing America's massive deficits.


 

Lots of media attention today focused on a Chinese central bank announcement promising to "enhance the renminbi exchange-rate flexibility."  The implication -- Beijing, at some point, is going to abandon the dollar peg it admits adopting for its currency two years ago in order to prop up exports, and resume permitting the very gradual appreciation versus the dollar that began in 2005.

At this point, however, a commitment to move to a genuine float -- a condition in which the currency would be traded freely -- is nowhere to be seen.  Rather, the People's Bank of China will maintain control over the value of the yuan, but will use its power to -- again, at some undefined point -- begin nudging it upwards.  In other words, the PBOC is also implicitly stating that it will retain the power to either refreeze the yuan or even nudge it back down if it believes conditions so warrant.  

Of course, at various times, many other countries have tried to influence the value of their currencies.  But given China's long record of maintaining complete ultimate control, and aggressively manipulating the yuan's value to serve Chinese interests, it's clear that this statement represents no significant change in Chinese policy.  Indeed, if the global economy shows further signs of heading into a second dip, we can fully expect Chinese authorities to refreeze or even devalue again.

At the same time, it's important to keep in mind a point that the U.S. Business and Industry Council consistently has made about the inadequacy even of a stated commitment to a float.  If foreign investors start to get nervous about the Chinese economy (and some clearly already are), at some point a float could result in a weaker yuan than is needed to reduce the trade imbalance significantly.      

Such uncertainties are what lie behind our view that imposing tariffs is the only reliable way to reduce the trade deficit enough to rebalance and strengthen the foundations of the U.S. economy and the world economy.  These tariffs would give Washington the advantage of controlling what it can reasonably hope to control -- access to the U.S. market, as opposed to the behavior of a foreign government.  Yet they must be high enough, sweeping enough, and agile enough to slash the deficit and keep it at levels consistent with genuine American and global economic health.  

Tariffs would also enable the U.S. government to offset the effects of whatever shell games Beijing has in mind -- i.e., increasing other forms of protection or subsidization to make up for any losses resulting from a stronger yuan.  Don't forget:  The Chinese have pulled this trick at least twice before -- when they revalued in 2002, and when they held the yuan steady in 1997-1998 (by increasing VAT rebates for exporters).  

The likelihood of shell games, moreover, makes it difficult and probably fruitless to predict that a certain degree of yuan revaluation will produce a certain reduction in the U.S. trade deficit.  The results depend heavily on what other actions China takes, and how effectively the U.S. government responds.  And the effects on the U.S. deficit also depend heavily on what actions foreign governments take in response.

Bottom line:  If President Obama and the Democratic leaders of Congress believe that Chinese statements like the PBOC's latest will significantly help them solve the jobs and growth crisis the country still faces -- much less solve it by the November elections -- they're delusional.  But they've bought pigs in a poke from China before.

 

Judging from the stock market’s reaction, it may be hard to believe that this morning’s latest monthly employment report is worse than it seems at first glance.  But it is.

Thank goodness the media and the markets immediately recognized that 411,000 of the 431,000 jobs created in May (95.36 percent) were temporary government census-worker jobs.  Their appearance obviously says nothing about the economy’s ability or potential to create sustainable employment.  Much more important was the pathetic 41,000 net new positions generated by the private sector – after literally trillions of dollars in government stimulus spending and bailouts!

Unfortunately, however, even these numbers don’t capture the U.S. economy’s full dependence on government life support.  The reason:  The standard definition of “private sector” is too broad.  In particular, it includes two big employers – educational services and health care services – that are so heavily subsidized by government as to substantially compromise their private sector credentials.

If the private and public sectors are more realistically defined, government’s role as an employer increases tremendously.  This morning’s jobs report shows that private sector employment currently stands at 82.40 percent of total nonfarm employment (the government’s proxy for total American employment).  That’s down some from the 83.88 percent figure recorded in May, 2007 – the last pre-recession year.  But it’s actually slightly higher than the May, 1981 level of 82.26 percent.  (1981 is the first year for which all these data are available on the search engine of the historical statistics provided by the U.S.  Bureau of Labor Statistics.)  So what are those Tea Party-ers and similar critics complaining about?

Here’s what.  Adding in the health and educational services jobs numbers brings last month’s private sector share of nonfarm employment to 67.48 percent.  That’s a good deal lower than the pre-recession figure of 70.61 percent in May, 2007.  And it’s considerably lower than the 74.23 percent figure for May, 1981.  

Another discouraging number:  Even though American manufacturers hired 29,000 more workers in May, manufacturing’s share of total nonfarm employment fell to 8.93 percent.  That’s down from 10.13 percent in pre-recession May, 2007, and much more than 50 percent below the May, 1981 level of 20.56 percent.  All told, this is how you reflate a burst bubble, not how you restore real health to the American economy.