After a morning which saw many investors waiting for a 1:30 pm update on the US economy finally the numbers for US employment and unemployment arrived. I will write on them in more detail later but the Dow Jones Industrial Average gave its own verdict by opening higher and closing some 127 points higher at 10447. This meant that the latter part of last week had quite a rally for world equity markets (the Dow had been as low as 9941 as recently as the 31st of August) and quite the reverse for government bond markets. The equity market rally carried on in to the Far East with the Japanese Nikkei 225 index rallying some 187 points to 9301.
The Commodity Research Bureau’s spot index of commodity prices rose by 2.03 to 461.43 and the foodstuffs component rose by over 1%, so perhaps “agflation” will return to the news agenda. The rise in the foodstuffs component of the spot index is now 23.9% over the last year. I notice that the United Nation has called a special conference on the subject of food prices, although caution is required if you expect much to come out of this as the IMF and UN had meetings etc. on this subject in 2008 and 2009.
The US Economy: The Employment situation
Friday’s numbers gave us an insight into the US employment situation where the Bureau of Labor Statistics told us the following.
1. Non-farm payroll employment declined 54,000 in August, however there was an impact from census employment declining by 114,000 and so if you allow for this then US employment payrolls rose by 60,000.
2. The situation for private employment was that it increased by some 67,000. This is a number used to measure how the US private-sector is doing.
3. There were favourable revisions in June and July for both these numbers with non-farm payrolls being revised up by 46,000 and 77,000 respectively. The private employment figures were revised upwards by 36,000 in July and 30,000 in June.
At this stage the numbers look not only better than expectations but rather hopeful as the revisions to back data lead to an improvement of 66,000 in private-sector job creation for example. So the US economy is creating more jobs than was previously reported. There were other factors which were favourable in this report. The employment- population ratio rose from 58.3% in July to 58.4% in August and the participation rate rose from 64.6% to 64.7%. There was also an increase in hourly wages.
However one factor has been prevalent in the UK employment situation so I took a look for it in the US numbers and there it was. There has been a rise in part-time employment. To quote the Bureau “The number of persons employed part-time for economic reasons … increased by 331,000 over the month to 8.9 million.” Now if one looks further back in the data to look for a trend you see that part-time employment has risen strongly over the credit crunch. To give an ides of the scale of the move the number of part-time employed only rose above 5 million in early 2008. So a lot of the reported improvement in employment has been part-time mirroring the UK situation. This takes quite a lot of the edge off the improvement in the numbers.
At first the situation here looks quite simple as this rose from 9.5% to 9.6%. However one can look much more deeply as the BLS also calculates unemployment in a much wider way to try to include things such as part-time and short-time working. This is its U-6 measure which is defined as
Total unemployed, plus all persons marginally attached to the labor force, plus total employed part-time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.
This rose from 16.5% to 16.7%. In many ways this represents the overall effect of unemployment much better than a headline rate. This is because someone who is now working 4 days a week instead of 5 for example is captured by it.
One much more hopeful signal was the fall in long-term unemployment recorded in these figures. Unemployment of more than 6 months fell by 503,000 to 6,249,000 and let’s hope that this trend continues.
So what did we learn from these figures?
Employment is rising at a faster rate that we thought but still not by enough to prevent unemployment from rising in these figures. Should this situation remain the same then unemployment will continue to rise. So they are not in fact as hopeful as equity markets have assumed who have been seduced by economists expectations being exceeded rather than looking at the underlying trends and numbers. The moves in U6 and part-time employment are significant.
As ever to be cautious in analysis. You see the numbers above come from two different surveys which are not compatible in every respect. Also to add to our caution the following happened in these numbers.The civilian population rose by some 550,000 but employment only rose by 290,000 so there was a shortfall there. This leads to the main thought that there is a lot of potential for error in the numbers from how accurately or not the population is measured.
Another factor likely to impact on unemployment is that as the economy improves people are likely to return to the labour force.
Other US economic numbers from last week.
If we look at was relatively significant we saw several factors. On the upside we saw the Case-Schiller index reporting that existing home prices had risen (although one needs to remember that this was for April,May and June rather than more recently) and that ISM reported that manufacturing had improved on its measure from 55.3 to 56.5. However the ISM non-manufacturing index fell and other components of its measure such as new orders were weak and we discovered that construction spending fell in July according to the Census Bureau. Just to add to the variability in economic numbers ADP had reported that private-sector employment fell by 10,000 in August which is completely different to the numbers above.
So there was perhaps a marginal improvement overall in the state of the US economy at the end of the week compared with the beginning. The much larger movement in equity markets was caused in my view at least in part by economists who because they had previously been too optimistic on the US economy reversed their forecasts to be much more negative just as one or two numbers improved. So compared to expectations the economic statistics did much better than if they are compared to reality.
The rise in part-time work is one of those factors which is simultaneously hopeful and troubling. The hopeful part is that it shows flexibility in the economy compared to the past the troubling art is that it shows that the “real” level of unemployment is much higher than recorded by the headline numbers if you allow for it.
The US economy going forwards
The obvious next question is what can we expect in the third and fourth quarters of this year. The recent trend for economic growth has been rather plain as the quarterly figures have now gone 5%,3.7% and now 1.6%. So growing but slowing is not a bad summary. The recent report from the Congressional Budget Office told us that the effect of the US fiscal stimulus had raised economic output in the second quarter by between 1.7 and 4.5%. In the next two quarters the range becomes 1.5 to 4.2% and 1.1 to 3.6% respectively so this impact is declining. For 2011 the impact is expected to be between 0.7 and 2.3% so the declining impact carries on.
For those confused as to why the impact lasts so long the truth is that fiscal policy is slow to act. As an example of this of the US $787 billion fiscal plan only some $512 billion has actually been spent so far according to the US government. However the effect to come is slowing just at the time the underlying economy also appears to be slowing. Thus it is hard to see economic growth doing any better than the 1.6% achieved in the second quarter. Accordingly at the end of the week my position is broadly unchanged as it is that the US economy is slowing and seeing data which is often contradictory does not change that. Those who have been baying “double-dip” firstly usually fail to define what they mean by that but secondly have no real case to advance from the data as to how we will get there. This of course does not mean it will not happen merely that we lack evidence in the same way that one might criticises optimists.
Moving forwards it seems likely that the following will occur.
1.Slowing growth will not be enough to reduce unemployment and indeed unemployment is likely to rise if current rends are sustained.
2. Slowing growth is likely sooner or later to focus investors minds on the size of the US fiscal deficit and on projections for her national debt.
3. Eventually this is likely to impact on her government bond market as lower forecast revenues and higher public expenditures are factored into forecasts. Even with a the recent rise in yields any outcome other than a severe economic slowdown leaves bond yields in the wrong place in my view.
Rather disturbingly the next set of figures which will give us any real insight are this weeks trade figures. The disturbing part of that is that trade figures have very few peers for inaccuracy….