Jobs and Production: Where’s The Improvement?

Yesterday we read that Bernanke gave a fairly upbeat assessment of the economy in his regular briefing of Congress. We also read that his information was derived, in part, from the local Federal Reserve banks, all but one of which – the laggard being St. Louis – reported improvement in activity and jobs within their respective areas. Finally just this morning the New York based Empire State activity index, which measures manufacturing in New York, showed a healthy jump from 22.9 to 31.9 last month, the biggest jump since 2004.

The markets have taken this and run with it: if we believe this narrative the outlook is much brighter than it has been for many months and the economy’s return to health is fully assured.

Hmmmm.

So why aren’t jobs and overall production showing signs of this improvement?

Conversely, what is it that Bernanke knows that is not publicly available?

I ask this because this morning’s two main reports, of new claims for unemployment assistance and that for industrial production, were both mediocre at best. A surface reading of them suggests a sideways trajectory not an improving one.

Let’s take a brief look at the reports:

New Claims For Unemployment Assistance

The surprise here was that claims rose again, by 24,000 this week up to a total of 484,000, This was in sharp contrast to the general market expectation which was for a drop to offset the prior week’s increase. Last week, if you recall, we were all scratching our heads wondering why claims had suddenly reversed their steady improvement and jumped up slightly. The Labor Department told us that the odd timing of Easter had muddied the data collection in some states and that there would be a correction soon. Once that correction had been made the downward trend would be visible again.

Obviously not this week.

While the ‘Odd Easter’ explanation for the increase could still be valid, we have to begin wondering at what point these excuses will no longer be needed to explain why the job market is stuck in neutral. Clearly the vast wave of job losses is behind us. The problem is that, for all the protestations about an improving economy, the business community is stubbornly clinging to a relatively down beat medium term outlook and thus doesn’t feel the need to hire.

This results in a very patchy tone within the recovery. Parts of the economy are doing reasonably well – health care for instance. Others are faring less well – construction being an obvious example. So far there is no dynamic sufficient to get all the economy’s different parts moving in unison.

I suspect this stuttering growth is what we will see for most of this year and well into next. This is why the jobs market is equally confusing to try to predict. And why it will remain stuck for a good while longer.

The issue is not the usual recovery process, we are certainly on the way to recovery, but is the long term adjustment we are going through as we rebuild the economy to rely less on consumption and more on savings and investment. This rebalancing inevitably reduces consumption and makes the prospects for business less clear than it used to be. In turn, this engenders hesitancy and thus a poor job market.

In this context we should expect to see the claims data improve slowly, but should not be surprised at episodes such as the past two weeks where the market stalls or even retreats somewhat.

Industrial Production

This same pattern of business hesitancy is clearly a factor in the industrial production data also released today. Output grew only 0.1% in March, down from February’s 0.3%, and much less than the 0.8% analysts had predicted. The slowdown was caused by two factors: a change in the weather reduced demand for electricity which shows up as a drop in production; and the general malaise within the economy evidently caused some retreat in factory output.

This latter point is important since it could also be evidence that the inventory re-stocking that was a major factor in GDP growth late last year and during the first quarter has now worked its way through the economy leaving us to rely on less cyclical sources of activity. Since those sources are heavily affected by business expectations the slow down between February and March may be an early indication that activity is not as strong as we thought.

So when we take an overall look at today’s data I am forced to conclude that, while the economy is growing, that growth is highly focused on certain areas, it is not systemic, and is therefore insufficient to justify claims of imminent breakthroughs.

Thus I find myself in a very different spot from Bernanke. He is portraying the economy as well on its way to health, and is even beginning to urge clear thinking in Congress – if that is possible – about ways to contain the Federal deficit. He is not advocating fiscal tightening just yet, but is evidently so encouraged about the economy’s prospects that he wants to shift the focus of discussion to the tough task of reducing the deficit.

In contrast I see the economy as growing, but still in need of support. This makes any discussion of fiscal restraint highly premature, and even dangerous if it is interpreted by the credit markets as a sign of concern at the Fed.As a result I represent a school of thought still advocating stimulus, especially for jobs, whereas Bernanke has now shifted closer to the fiscal hawks and sees the economy robust enough to withstand the dampening effects of tightening – not yet, but soon. To make that shift he must have seen plenty of improvement.

Given today’s jobs and production data I am led to ask: where is that improvement?