The good news on weak jobs

June 3, 2011, 7:26 PM UTC

The good news out of Friday’s jobs report is that everyone’s favorite economic villain, commodity prices, may be about to change sides.

The weak jobs report Friday adds to the sense that U.S. growth is slowing. That’s yet another setback for the 13.9 million people out of work, and an unhappy thought for anyone gunning for better wages or more hours this year.

Cross your fingers...

You can blame the past year’s surge in prices for food, fuel and other goods. The CRB index of commodity prices is up 36% over the past 12 months, and the U.S. retail gasoline price is 39% higher than a year ago (see chart, right). That’s money consumers can’t spend on anything else, which in an age of slack job growth and stagnant wages inevitably depresses demand for other stuff.

“The cumulative impact of the climb in commodity prices is taking its toll on growth and employment,” says Nigel Gault of IHS Global Insight.

But the latest slowdown signs, unwelcome as they are, point toward a bit of relief from the commodity scourge. Already we have seen indications that U.S. demand for gasoline has been softened by pump prices near $4 a gallon, with the MasterCard index of gasoline demand consistently showing 1% or so declines in recent months.

So far, pump prices have fallen less than half as much as the cost of the crude oil that gasoline is refined from, as producers run off existing stocks and keep an eye peeled for new supply shocks.

But if the U.S. economy keeps sputtering and the world can avoid another Middle East flare-up, it is likely that gasoline prices will weaken further – which could put a bit more cash in pocketbooks in the second half.

Indeed, even bears on the economy call this the most likely outcome. It is why even after a gain of just 54,000 jobs in May, next to no one is calling for the dreaded double-dip recession.

“We probably will see growth rebound in the second half of the year,” says Paul Ashworth of Capital Economics in Toronto, “as commodity prices drop back and any Japan-related disruptions unwind.”

When 2011 started, many economists expected to see the domestic economy growing at robust rate of 4% or so. A tax cut enacted late last year was supposed to put more money in consumers’ pockets, which would lead to more spending and to additional hiring, in the sort of virtuous cycle typically seen in economic recoveries.

But an oil price spike, fueled first by the Fed’s easy money policies and then by the Arab spring uprisings, siphoned the extra funds from taxpayers’ pockets. By now, few forecasters are projecting much more than 2% growth in the first half of 2011.

A drop could drive more spending

Lower commodity prices, when they arrive, will surely be good news for a flagging recovery, though stretched world oil markets mean a further fall in gas prices is hardly certain. And even if  prices do slide, there are plenty of other risks to the economy.

The dollar looks sickly, Washington is wringing its hands over the budget rather than acting, and Europe looks on the verge of financial disaster.

Any or all of those chronic problems could turn acute any day now – which might well bring commodity prices down further, but at great cost to the economy, if you recall what the second half of 2008 looked like.

But then, that’s life in bubble world.