- The labor report for August, including the upward revisions to the prior two months, should further reduce fears for a double-dip recession.
- Although many economists have been touting that the current recession is another jobless recovery, the data shows that private labor markets are improving, albeit slowly.
- The meager gain in real GDP in the second quarter is likely to be followed by a return towards two to three percent real growth (or higher) in the second half of this year.
The rumors of the demise of the private labor market and the economy have been greatly exaggerated. Early last spring the employment data revealed a solid rebound in net new private job hiring that appeared to dry up as summer began. The revised figures now show that the pause was not quite as significant in June and July and that the inflection point in the labor market in May coincided with the European debt crisis that unfolded in the late spring. The August data and the upward revisions in the prior two months show that labor conditions are heading in the positive direction, but at a slow and gradual pace.
The labor report for August, including the upward revisions to the prior two months, should further reduce fears for a double-dip recession. Nonfarm payroll employment fell just 54,000 in August, versus forecasts among several economists that payroll employment could decline as much as 150,000 last month. Private payrolls rose 67,000 last month versus “whisper number” fears for a decline in private sector jobs. The labor department also announced a significant upward adjustment to the payroll data for the prior two months which added 123,000 jobs to the series, with more than half of these “new” jobs centered in the private sector.
Thus, the data now show that private sector employment for the latest three months increased by 235,000 workers (78,300 per month), while the year-to-date gain in private payrolls gain is 763,000 (95,375 per month). Although many economists have been touting that the current recession is another jobless recovery, the data shows that it is a limited job growth recovery. This, combined with solid background labor statistics and strong household private-sector job gains, provides support for a continuation of an economic recovery.
The index of aggregate weekly payrolls, which many economists view as the best measure of the quality of employment because it takes into account the number of jobs, the length of the workweek and earnings, rose 0.3 percent in August after an 0.6 percent gain in July. This represented the fifth increase in this index in six months, a significant improvement from the protracted period of declines (15 of 16 months) between mid 2008 and the fall of 2009.
Near term, the latest labor market data should help to fuel a solid rise in personal income for August and an associated increase in the personal savings rate. Although factory employment dipped after a sharp rise in July (as the auto industry departed from its usual layoff and recall pattern for annual model-year retooling), a rise in the factory workweek and factory overtime should spark a modest rise in industrial output last month, after the robust 1.0 percent gain in July.
Perhaps the most interesting sign of improvement in the labor market was that private household employment unexpectedly surged 891,000 in August, the biggest monthly gain in a decade. Moreover, since the start of 2010, private household employment has increased by 2.3 million workers, versus the meager 763,000 rise in private payroll employment. Historically, at turning points in the economy, private household employment leads private payroll employment. The latest year-to-date discrepancy between these two readings of private-sector employment is extreme at more than 1.5 million. This, in turn, strongly suggests that at least a portion of the discrepancy might be a hint that the nonfarm payroll employment series has been undercounted this year and will be revised upward when the government conducts its annual benchmark revisions to this data over the next several years.
The latest report on layoff intentions compiled by Challenger, Gray, & Christmas revealed a sharp moderation in layoff announcements. This data points to a likely improvement in employment in three to six months. More specifically, the Challenger report revealed a 17 percent decline in layoff intentions by companies to just 34,768 in August, from 41,676 in July. This represented the lowest level of layoff announcements in 10 years and suggests that employers are reluctant to lose any more skilled core workers. Although economic conditions may not be encouraging on the new hiring front, the data implies that many companies have stopped reducing the size of their workforce. Moreover, on a year-over-year basis, layoff announcements dropped 55 percent, from 76,456 in August 2009.
In similar fashion to the spring pause in labor conditions, the meager 1.6 percent gain in real GDP in 2010:Q2 (which could be revised to a softer reading at the end of this month) is likely to be followed by a return towards two to three percent real growth in the second half of this year. The source data behind the real GDP reading in 2010:Q2 shows that the data was not as weak as the headline print. Final sales to domestic purchasers, a measure of aggregate demand that includes imports but excludes exports, rose 4.3 percent in 2010:Q2, a sharp improvement from the 1.1 percent per quarter gain in this component in the prior three quarters. Likewise, real gross domestic purchases—purchases by U.S. residents of goods and services wherever produced—increased 4.9 percent in the 2010:Q2, compared with a 3.9 percent gain in 2010:Q1.
The sharp deceleration in real GDP in the April to June quarter was largely due to an unexpected and unsustainable 39.3 percent increase in imports. Historically, strong imports, correlate with either a rise in consumer spending or a desire to replenish depleted inventories, both of which would point to a partially offsetting boost to economic activity near term. However, this latest surge in imports was the primary catalyst to a 3.37 percentage point drag from net exports in 2010:Q2 – the most severe contraction from the net export position in more than 60 years. A closer look at the monthly trade data revealed a 13 percent explosion in imports from China in June. This surge in imports from China in June might reflect increased stockpiling ahead of the expiration of export-tax rebates on several Chinese products in July as well as a desire by U.S. companies to buy goods from China ahead of mid-year price increases or a feared appreciation of the Yuan. In either case, what hurt the trade gap in June and real GDP in 2010:Q2 is likely to temper in the second half of the year.
Data released just last week confirms this aberration in the trade gap; accordingly, a narrowing in the drag from the trade sector is likely to provide a hidden source of growth for the U.S. economy in the second half of 2010. So beware of Chicken Little: the fall is more likely to bring good news than bad.
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