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4 April 2011

On the day McDonald’s announced 50,000 new jobs in the US . . .

. . . what exactly is going on here at home?

By David Blanchflower

There was a big announcement on the jobs front in the United States today. McDonald’s announced that, on a single day, 19 April, it will hire 50,000 workers, increasing its US workforce to 700,000.

The average pay for these jobs is $8.30 an hour, or around £5.13 an hour. Consistent with the news from McDonald’s, the US — which has maintained its stimulus — continues to report really good news nationally on both growth and the jobs front.

Fourth-quarter GDP was revised up from an annual rate of 2.8 per cent to 3.1 per cent, with personal consumption playing a major part in driving this number up.

Non-farm payrolls — a measure of employment by firms — increased by 216,000 on the month, while the unemployment rate fell from 8.9 per cent to 8.8 per cent. Unemployment in the US has now fallen by 1.5 million between November 2010 and March 2011.

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The big question for the UK, where unemployment is rising again, is where are the new jobs going to come from. Unsurprisingly, the chorus of opposition to Osborne’s excessively large cuts is getting louder.

Comments from my old friend Alan Blinder, professor of economics at Princeton and a former vice-chairman of the Federal Reserve, are especially noteworthy. Writing in the Wall Street Journal last week about what he considered the major obstacles to growth in the US, he argued:

The current budget battle might lead to excessively large cuts in federal spending at a time when the economy is still fragile — much like what is happening in the UK. Frankly, I don’t lose any sleep over this one. Gridlock will protect us.

The Nobel Prize-winning economist Paul Krugman also criticised the coalition’s “unforced and ailing” strategy this week. Tinkerbell wouldn’t be there to help out, he wrote:

Like America, Britain is still perceived as solvent by financial markets, giving it room to pursue a strategy of jobs first, deficits later. But the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pull-back. As I like to put it, the Cameron plan was based on belief that the confidence fairy would make everything all right. But she hasn’t: British growth has stalled and the government has marked up its deficit projections as a result.

The evidence continues to come in that the austerity programme is hitting the consumer hard. Real disposable household income fell by 0.5 per cent last year, which is the first this has shrunk in 30 years.

The collapse in consumer confidence that we have seen since the coalition took power was inevitably going to lead to a decline in consumer spending. The CBI’s distributive trades survey suggests that retail sales remained subdued in March and there is worrying evidence of slowing sales from a number of well-known high street stores. So far, it includes Argos, Comet, Mothercare, Dixons, Laura Ashley, Thomas Cook, Signet (which owns the jewelers H Samuel), Leslie Davis and Ernest Jones Stores, H&M Swedish fashions, sofa retailer DFS, Sainsbury’s, Halford’s and even Domino’s Pizza.

Oddbins, Officer’s Club, Alworths and Sofas UK, which traded as Easy Living Furniture, have all gone bust.

The Office for Budget Responsibility (OBR) in its Budget forecast expects that real household consumption will rise each year from 2011-2015. Within a week of the Budget, the debris on the British high street suggests that forecast is in doubt.

If these historically low levels of consumer confidence lead to further slowing in consumer spending, as seems likely, that is inevitably going to push the UK economy back into recession. In a period of falling real incomes, it seems unlikely the consumer would want to take on lots more debt to fund extra consumption. And, of course, they shouldn’t. That then puts George Osborne’s strategy in terminal trouble. The main worry for him is that GDP growth in Q2 and Q3 of 2011 will be negative.

As the Labour MP and member of the Treasury select committee Chuka Umunna pointed out in the House of Commons last week when questioning the Chancellor, the coalition’s policies, far from cutting debt, simply shift public debt on to households — and that is the “good” news. The OBR has increased its prediction of total household debt in 2015 by £330bn since its last forecast in November and is now forecasting that debt, as a percentage of household income, will rise from 160 per cent in 2010 to 175 per cent in 2015, having previously forecast a decline.

The even worse news is that private spending is unlikely to fill the gap left by public spending cuts — it makes sense not to spend and to undertake precautionary saving for the bad times to come. So, if we choose to be frugal instead and not take on lots more expensive debt, growth plummets and unemployment increases. And then it’s goodbye Osborne.

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