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Weekly Economic Commentary


While joblessness is still very high, the September employment data depict widespread improvement in labor market conditions.Helpful credit conditions have made auto sales a bright spot.

October 5, 2012

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  • While joblessness is still very high, the September employment data depict widespread improvement in labor market conditions.Helpful credit conditions have made auto sales a bright spot.
  • Despite the polarity of election politics, discussions aimed at averting the fiscal cliff are underway.
  • Recent reports from China align with impressions of reduced economic growth.

All the signs of fall are at hand. The morning air is crisp, the leaves are turning red, and soups are back on my weekly menu. I have, however, noticed one change from normal seasonal rhythms: some stores have completely skipped over the harvest/Thanksgiving promotions and gone straight to Christmas merchandising. I think there should be a law: no green and red until after Halloween, at the earliest!

I suppose you can't blame merchants for being anxious about holiday results, which account for a significant faction of annual sales and profits. Today's news on employment, though, has the potential to spread a little cheer. The household survey presented a series of favorable developments, with unemployment declining to 7.8% in September after holding between 8.1% and 8.3% during the first eight months of the year. This is the lowest unemployment rate in more than four years.

Some recent declines in the jobless rate have been the product of declines in labor force participation, but the labor force (+418,000) registered a large gain in September and the participation rate rose.

WEC 10/05/12 Chart 1

In addition, long term unemployment has moved down to 40.1% of the unemployed from 41.9% in June. Still unacceptably high, but moving in the right direction.

One could certainly point out that the reported increase of 873,000 jobs implied by the household survey seems unusually large, and somewhat at variance with the payroll survey. In addition, nearly 600,000 of these positions represent people working part-time because full time work is not available. As a result of this latter reading, the broadest measure of unemployment remained unchanged in September.

WEC 10/05/12 sidenote 1Yet the payroll employment report was also encouraging. 114,000 new positions were created in September, marked by broad-based gains in the service sector (+124,000). More importantly, the upward revisions of hiring in July and August were constructive as they added 86,000 jobs to the earlier estimates and changed the underlying trend of payroll employment.

WEC 10/05/12 Chart 2 

Another noteworthy aspect is that the gain in hourly earnings was solid in September and suggests a corresponding increase in personal income, which would imply support for consumer spending.

The monthly job report is always closely watched, but this one received a special focus because of the proximity of the election and the Fed's aim to bring about a “substantial” improvement the labor market.

The minutes of the September FOMC meeting, released yesterday, point to a vigorous discussion about employment conditions. Many participants were considering framing forward guidance in the form of numerical thresholds for labor market and inflation indicators, but the challenge of selecting from among many relevant metrics led the majority away from this strategy, at least for now. The subject remains under study.

Those wondering when the Fed's quantitative easing might end (a cynical partner of mine has taken to calling the latest round “QE forever”) did not get the definitive decision rule they were hoping for.

The current recovery/expansion is thirteen quarters of age. Putting the pace of job creation in historical perspective helps to appreciate the Fed's “grave concern” about employment conditions. As the chart below indicates, the current hiring trend compares poorly with the performance seen during prior business cycles.

WEC 10/05/12 Chart 3

So there is still some catching up to do, and it would be hyperbole to call the September readings robust. But many aspects showed marked improvement from the recent past.

I'll be spending a portion of this holiday weekend purchasing pumpkins, mulling cider, and wrapping the corn stalks around the mailbox. Christmas will just have to wait.

Cliff Notes

With the election barely a month away, I've been surprised by recent reports that politicians are talking about more than the latest polls and their opponent's shortcomings. If the news accounts are to be believed, the Federal budget is getting some serious attention.

The impending expiration of tax preferences and the onset of automatic spending cuts form what some have called a “fiscal cliff.” The Congressional Budget Office has warned of renewed recession in the event that Congress fails to ameliorate the cliff's impact.

WEC 10/05/12 Chart 4

The uncertainty surrounding the “cliff” has been cited as a deterrent to economic activity. Firms and investors who lack clarity over the course of tax rates might tend to sit on the sidelines, rather than taking more aggressive steps. Sluggish readings on employment and capital spending have been attributed, in part, to the uncertainty surrounding Federal finances.

WEC 10/05/12 sidenote 2The conventional wisdom has been that nothing meaningful will be done on this front until after the election, or even until the new Congress takes its place in January. Hoping for leverage that might come from next month’s balloting, Republicans and Democrats have been expected to defer deliberations on fiscal issues.

Yet it has emerged that the two sides have been in meaningful discussions. Treasury Secretary Tim Geithner recently met with Congressional leadership to tackle fiscal issues, and the Ways and Means Committee has stepped up its deliberations. The suddenness and size of the cliff’s impact have created a pre-election urgency.

There seems to be agreement in a couple of areas. Defense spending is slated to come in for $600 billion in cuts over nine years, which might compromise national security and would certainly eliminate thousands of jobs. It seems likely that at least some of that will be restored. In addition, there is bipartisan support for allowing the temporary payroll tax reduction to sunset; this will help restore cash flow into Social Security and Medicare, but will cost the average household about $1,000 annually.

There may be other low-hanging fruit on which the two sides can reach consensus before November 6. But there is still considerable dissonance on the future course of tax policy and entitlement spending. Without a compromise in these two areas, a long-term budget agreement will remain difficult to achieve.

Some analysts suggest that a deal will be reached that provides a temporary fix, deferring hard discussions until later in 2013. In that event, we might feel a bit like Wile E. Coyote; we’ll have gotten past the cliff without falling, but we’ll still be staring at a canyon below, hoping that gravity does not assert itself. That is not a comfortable place to be.

China – Incoming Data Fail to Temper Intensity of Concern

In the September monthly economic commentary, Northern’s China expert, James Pressler, opined that underlying economic fundamentals of China are far softer than the message implied by official numbers. Data from the official Chinese factory and non-manufacturing purchasing managers’ surveys continue to support this point of view.

The Chinese factory sector purchasing managers’ index (PMI) sector edged up slightly to 49.8, just shy of the critical 50-point mark which would signify a turnaround. The third quarter factory PMI’s decline is the largest drop in the last two years. The non-manufacturing sector’s overall index also fell in September (53.6), the fourth decline in six months, implying a loss of momentum although the level is indicative of growth.

WEC 10/05/12 Chart 5

Details of the surveys offer more insight; the third quarter output index of the factory survey is the lowest in nearly four years. Exports indexes from both surveys denote a contraction in activity, with the factory export orders index (-2.7) recording the largest quarterly decline since the final three months of 2008. Undoubtedly, the weakness in export orders reflects the global economic slowdown, but the implication for growth and employment in China is strongly negative. In short, market expectations of new support for economic growth have risen amidst the flurry associated with the leadership change in the next month.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.