jobs

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Weak Jobs Gain

There is not much to say about today’s unemployment and jobs reports. In way the data contains slightly contradictory stories. This is because there are two sources for the information we lump together in the report: the survey of business and the survey of households. The two sometimes diverge in their narrative. Perhaps now is one of those moments.

First the business survey.

This is the one that gets the headlines because it tells us how many jobs have been added. We learned today that the economy added 80,000 new jobs in October. That’s not very good, since it lags the inflow of people into the potential workforce and so should, I emphasize should, therefore cause the unemployment rate to rise. Before we get to that, let me report that the slightly better news embedded in the data is that we added more jobs in both August and September than originally thought – to the tune of 102,000 more.

This is nothing to get too excited over, and stays well within the bounds of an outlook of mediocre growth in the range of 2.0% to 2.5%. These kinds of monthly additions simply tell us we are not contracting nor are we growing at a sufficient rate to chip away at unemployment. The malaise continues.

But.

The household survey tells us a different story.

Contrary to what I just suggested, the unemployment rate, which is calculated from the household survey not the business survey, fell from 9.1% to 9.0%. This apparently perverse result is a direct result of using different sources in the calculation. The number of people reporting that they are employed has risen much more steeply in the household survey – for instance it rose by 277,000 in October, which is radically different from the 80,000 of the business survey. Not only this but the number of discouraged workers, part time workers, and other measures of weakness in outlook for jobs, all fell significantly. This is a trend that developed over the summer, and so we now have a strong divergence in the message being sent by the two surveys.

What do we make of this?

I think it is too early to tell. The business survey is much more inclusive and has been much more reliable through time. So the sluggish story has more credibility, and should affect our thinking more decisively. But the more upbeat message coming through the household survey is hard to ignore, especially now that it has been consistent for a few months.

Eventually the two surveys should converge again. This current divergence is not unusual at inflection points in the economy’s trajectory, so it may be that we have arrived a critical moment. If so we ought to detect a shift in spending and confidence over the next few months. That we have not seen such a shift suggests to me that the household survey is simply filled with noise that masks a more downbeat story. After all the sample size, while very large for such a survey, is still narrow enough that the results need to be handled with care.

Over all, as you can imagine, I err towards reliance on the business survey as the better guide as we try to predict the employment outlook. Job generation is still a sputter rather than a roar. But we would be wise to keep an eye on the household data, lest we miss a key moment in our change of fortune.

My forecast stays the same: sideways motion is the most likely outlook. Let’s hope I am wrong.

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News not Greek

It is hard at the moment not to be mesmerized by the melt down of the Euro. One moment we are told a major position has been established. The next, what was impregnable crumbles to dust in the face of inexorable economic and financial logic. As I see it default is both inevitable and desirable. Inevitable because the burden of debt on top of horribly ill-conceived austerity measures is creating a social backlash that cannot be resisted. Desirable because it would give space to the Greek economy within which much needed reforms can take place without undermining civil society. Desirable also because creditors need to be disciplined just as much as debtors: they need to be reminded that lending is a risky game, and that losses are a natural part of the process of banking. Both buyer and seller need to beware. Stuff happens, and money may not get paid back.

Meanwhile in news not Greek:

The US economy meanders along in it well established stagnant rut.

This week you may not have noticed the news amidst all that Greek drama – on a personal note, my late father-in-law was Greek and grew up in the town of Drama, so he would have enjoyed the current dramatics on a decidedly personal level. Here’s a brief summary of this week’s action:

The Chicago index of industrial activity slipped from 60.4% to 58.4% this month. This supports the general notion that things are not accelerating, but that they are still not collapsing either.

On a slightly more worrying note, the Institute of Supply Management’s measure of manufacturing edged down also, to 50.8% in October from 51.6% in September. Neither of these readings is particularly strong – a reading of over 50% indicates more companies are expanding than contracting. Obviously if we slip any further we should all be concerned that we are seeing the beginnings of a more broad contraction. That October result is perilously close to the borderline. So this index bears watching over the next few months.

Worrying too was the drop in construction spending, which has hardly been robust of late anyway. The latest figures are for September when construction eked out only a 0.2% gain. August had seen a 1.6% gain, so things have slowed down a bit, from rotten to really rotten. This decline didn’t make the headlines, however, because most forecasts had been for an even worse result, and weather may have distorted things too. Still, there is no sign of an incipient boom anywhere to be found. The meander continues.

Lastly, and to support the prognosis of stagnation, today’s ADP report on private payrolls is nothing to write home about. The private sector added 110,000 jobs in October. This is neither good, nor atrocious. It is down slightly from September’s 116,000, but not significantly enough to worry about.

All of this sideways motion contributed into the Fed’s decision to stand pat on monetary policy. The two day Federal Open Markets Committee meeting concluded this morning with a rather tepid press release. At this point I usually launch into a tirade about the Fed’s hawks because they perpetually interpret all this mediocre news as a sign of an imminent burst of growth, sufficient to cause rapid a inflationary spiral. They are thus normally on the side of caution and want to see the Fed start to undo its easing and to tighten things up. How they arrive at this position I have no idea, they seem to be content to ignore the actual evidence and to rely, instead, on fantasy visions and doom laden scenarios in their minds.

But, not today. The only dissenter from the Fed’s current position sees things as more gloomy than me. He wants more easing. This is so unusual I have to bring it to your attention. When even the hawks are quiet, and when the only dissent is on the side of easing, the economy cannot be in the rosiest of shape.

That our hawks are quiet is of little help in global terms. The crazies running the European Central Bank seems intent on being horribly destructive. Those hawks make ours look positively sparrow like. The economists at the ECB qualify for the title of ‘weapons of mass destruction’. Perhaps the US should invade the ECB on that pretext?

Oh. Wait. We used that excuse already.

How did that work out?

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Consumers: Grumpy, But Spending

At the tail end of another week dominated by the absurdities of politics – this week we were treated to yet another Republican jobs plan that appears to have no jobs in it – we hear that retail sales rose nicely in September despite the continuing pessimism and general grumpiness of American consumers.

I have said it many times, but it is worth repeating: these kinds of contradictory reports are typical of an economy adrift rather than moving in any particular direction.

The retail sales gain of 1.1% in September was a bit of a surprise. Most of us thought a number closer to 0.5% would be about right. The big difference came in a modest, but significant enough, rise in auto sales, which bounced back from a weak August. There is a possibility that we should average the two months out to get a better idea of the economy’s rate of travel, but even then there is definitely sufficient strength to prevent notions of renewed recession popping up in conversation. Sales excluding autos rose a more modest 0.6%, but that too was a bit stronger than expected.

Given that both the July and August figures were lifted from their original estimates, it seems that consumers spent at a fairly good clip through the summer, so the third quarter GDP figures could be stronger than the 2.0% I have been predicting. We should, of course, remain very cautious. The GDP consumption numbers do not tie directly with retail sales and so may be weaker, and the sales figures may end up being revised down. Having said that there is enough evidence for us to assume that poor consumption will not be the cause of an overall downturn any time soon. But nor will consumption drive us forward either: even though retail sales stand about 8.0% above where they were last year, demand is just too weak for us to think in terms of a steady or robust period of growth.

This is particularly true when we take into account the sour mood of consumers.

Today’s news that the University of Michigan measure of consumer sentiment dropped about 2 points to 57.5 in early October, caught many people by surprise: the general feeling was that it would stay around 59. At the risk of being repetitive, the causes of this sour mood are very obvious: wages are weak, unemployment is still high, general prospects are dim, real estate is mired in a deep rut, and our political gridlock is eroding any chance that policies will fix any of those problems. People just seem to be ticked off.

Sure, they’re still buying things, but they are being very careful about what they commit to. The energy and confidence is lacking to pick up the pace, and the feeling is that things will get worse rather than better.

This is hardly the stuff of vigorous growth. But it is the stuff of stagnation.

Lacking leadership, coherence, and ideas we appear destined to limp along for a while.

It need not be thus, but it is. Shame on us all for not being able to solve this mess.

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The Outlook

I read today that Moody’s suggests a new recession has about a 40% chance of occurring in the foreseeable future. I think that’s a bit high. The problem we have at the moment is that our elite is doing everything in its power to diminish growth. Moody’s says that policies will chip about 1.7% off of GDP growth next year. That I agree with.

Nothing in the recent spate of numbers suggests great strength. I cannot detect anything lurking in the weeds capable of jump starting robust growth. The great dead hand of low demand coupled with continued debt pay down by households dominates any countervailing positive movement. The lack of a coherent job creating policy, and the very real prospect that bitter politics will preclude such a policy anyway, will stop the recovery in its tracks.

Businesses are flush with cash, but are not expanding because they see no demand for their products.

Wages have been pummeled by the recession and were weak going into it anyway. Workers have been the butt end of productivity growth and have watched profits soar while being told they are at constant risk of dismissal. Consumers are fearful of the future and are holding back.

The housing crash exposed the growth – what growth there was – of the past few years as a total illusion. Debt is only a justifiable long term support for growth as long as wages keep its repayment within decent limits. Beyond such limits it becomes a time bomb that will eviscerate swathes of the economy and will create lingering after effects that take years, if not decades, to mop up.

The banks are still weak. They are now laden with sovereign debt. No one seriously believes that they are stable. Their dependence on gambling profits remains high. Their capital is stronger, but they resist true reform.

Europe is gripped by a fever of incompetent politics. The peripheral nations like Spain and Portugal are being asked to bear the brunt of poor decision making and improper policy by the central nations like Germany and France. The flood of cheap money – the core of the current crisis – perverted relative productivity within the Euro zone. No one cared until the crisis erupted. Now the obnoxious moralizing from the center diverts attention away from the culpability: the system was rigged. The failure to solve the problems is epic. It could lap across the Atlantic and erode our banks.

European failure means that trade will not be an elixir either. Indeed the world economy is slowing down as the emerging nations are all entering rougher patches.

So there is nothing to provide sufficient power to lift America out of stagnation.

Thus the economy looks stuck in a growth pattern of around 2%. Maybe 2.5% next year. With the majority of the variance from that level likely on the downside. Not a 40% chance of a new recession. But not a negligible chance either. We are well and truly stuck and thus vulnerable to any storm that crops up.

That is not a happy place to be. But it is where we are.

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Stagnation Watch: GDP, Jobs, And Confidence

We are almost at a point where we can all take a month or so off after which we would return to be met by economic reports eerily similar to those we left behind earlier. Nothing substantial is going on. Nothing. We are stuck in a malaise. Neither sinking nor rising with any consistency or velocity. We are lingering. Or perhaps, given the political idiocy current in Washington, a better word is malingering.

Today’s numbers on the economy support this view. The latest estimate of second quarter GDP showed a slight upward revision to 1.3%. Let’s not cheer that slight upward move because 1.3% is pathetic and would be cause for alarm were it not following the first quarter’s 0.4%. Suffice to say that, thus far, 2011 has been a year to forget. Here’s the breakdown of where that 1.3% came from:

  • Personal Consumption contributed +0.5%
  • Private Fixed Investment contributed +0.8%
  • Net Exports contributed +0.2%
  • Government Spending deducted -0.2%

I have rounded all these numbers liberally for ease of comparison.

So what stands out?

Consumption is at its lowest pace since the end of 2009. There was so after a string of decent, but not great, quarters since then personal spending seems to have sunk into a lull. Tuesday’s Conference Board consumer confidence figures, where the confidence index was stuck at 45.4 in September compared with 45.2 in August suggests that we are not about to experience any sort of a sustained surge either. Bear in mind that in a healthy economy that index records regular readings of over 90. We are a long, long, way from those heights and will not return any time soon. This remains a fear riddled economy for all the reasons we have discussed endlessly – unemployment, real estate, lack of wage growth, and political impasse. I see no change on the horizon. It is likely that consumption will bounce around a little over the next few quarters as households are forced into replacing needed items, but the days of higher and voluntary consumption will not return until that fear abates. That will take leadership in Washington and wage increases in business. Neither are on the horizon. Hence more malaise is headed our way.

The increase in investment fits well with the other figures we have been seeing and reflects the fact that business continues to nibble around the edges of expansion and improvement rather than going full bore. As we would expect almost all of private investment came via business activity, home construction barely moved, while inventory adjustment registered a slight drag on the numbers. Investment, or the lack thereof, has become central to the political farce. The Right wingers are arguing that business is not investing because it lacks confidence in the future, and that it is government red tape, intervention, and potential tax hikes that are doing the damage. That story sounds plausible until you go and talk to businesses. When polls are conducted of business attitudes the number one reason – by far – underlying a hesitancy to invest is that lack of demand. Those confidence issues, so beloved of supply side economists and right wing politicians get scant mention. It would be a welcome change were our Congressional leaders to follow the actual complaints of business and thus deal with weak demand, rather than continually create artificial but ideologically congruent ghosts at which to aim. We won’t get them to deal with real problems any time soon of course The truth is far to inconvenient.

There really is not much to add when talking about trade. Neither exports nor imports are showing a wildly different trajectory. Both bounce around a bit from quarter to quarter. And, in any case, trade is not a major factor in US GDP – not when compared with nations that are trade dependent like Japan or Germany. We are not going to export our way to good growth. An unusually high percentage of US business activity is non-tradeable and service oriented, meaning that it is activity that needs to take place locally and is thus immune to the global trends that have so depressed the sector subject to foreign competition. Besides Europe and other developed economies are hell bent on contraction rather than growth so exporting to them would be difficult.

Finally the GDP figures reveal, as they have for a while now, that whatever stimulative impact of government spending at the Federal level is being swamped by contraction at the state and local level. I will not re-hash the stimulus argument other than to say that, by any objective measure, it was a both a success and way too small. So it while it succeeded in stopping a free fall, it failed to launch a recovery. By now its major impact has worn off, and due to the perversity of accounting, that wearing off actually creates a net drag on growth. Meanwhile defense spending provided most of what positive impact we saw at the Federal level, and that is not sustainable and tends to be volatile anyway.

So, where are we?

Going sideways. There is no evidence of any substantial strength anywhere. Nor are there egregious weaknesses popping up. We are stuc, and likely to remain so for a while. Maybe a very long while.

One last thing: today’s news that first time claims for unemployment assistance dropped to 391,000 – down 37,000 from the prior week – has been [mis]interpreted as a positive sign that our weakness may be ebbing. We have been here before, earlier this year. Before we rush to publish positive reviews we need to think thoroughly about what the numbers tell us. First, the four week moving average is still high, at 417,000. Second long term unemployment is now our major problem, not just these short term job losses. And third, at any point in recent history a figure in the high 300,000’s would have been cause for despair. There is no way that this report should be used to justify claims of a brighter future. On its own it is bleak. Taken along with its predecessors it is grim. We remain mired deeply in a jobless recovery, with no end in sight, and with no political will to undertake a fix. And before you make assertions that this is an unusual circumstance, I should remind you that the past two recessions were also followed by weak employment and near jobless recoveries. The 2001 recovery was so weak that it scarcely registered. Indeed we can argue with some justification that the entire last decade constitutes a “lost decade” and that we are now well embarked on our second.

In a less farcical political environment that would be sufficient to spur stimulus, and policies designed to help. Unfortunately sanity has long been cast aside and obdurate negativism substituted in its place. Congress has decided to make matters worse in order to create electoral advantage – the Republicans prefer high unemployment so object to any solution. Hence the outlook for further malaise. I doubt the next election will produce a sufficiently decisive result to break the gridlock, so the malaise looks set to last well beyond 2012.

Get used to it.

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