Monday, April 9, 2012

Can the US Drive World Growth, Redux: PCEs

Last week, I wrote the following regarding PCEs and the job market:
It's possible we could see the following: consumers continue to tap their savings and consumer credit to increase purchases.  But central to this is the need to continue to see improvement in the job market.  If the unemployment rate continues to drop, we will see a boost to consumer confidence, which will in turn lead to increased purchases.  However, a slowdown in the employment figure would be fatal, lowering confidence and limiting consumer purchases.
The employment report was obviously a disappointment from this perspective.  According to the BLS report, the establishment figures had been increasing close to 250,000 for the preceding three months, making the 120,000 headline number a clear disappointment.  But there were added data points that cause me great concern.
The average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour to 34.5 hours in March. The manufacturing workweek fell  by 0.3 hour to 40.7 hours, and factory overtime was unchanged at 3.4 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.8 hours.

The above chart is from the BLS and shows that, while the index dropped last month, it is still in an uptrend.  But, the fact the index is still below pre-recession levels tells us we still have a long way to go to fix the job market.  It also tells us there may be a fair amount of slack in the current employment market which will allow companies to simply increase hours worked rather than hire new employees.  

However, there was some good news in the report about wages:
In March, average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents, or 0.2 percent, to $23.39. Over the past 12 months, average hourly earnings have increased by 2.1 percent. In March, average hourly earnings of private-sector production and nonsupervisory employees rose by 3 cents, or 0.2 percent, to $19.68.

However, increasing wages don't add up to enough of an advance if we don't see an increase in hours worked, which is why the first data point is a problem. 

Overall, this is one report, which means you don't want to read too much into it.  As the Economists' blog notes:
I think it’s premature to say it's deja vu all over again. First, 120,000, while well below expectations, is still above the trend growth rate of less than 100,000 and better than what was recorded during the air pockets of 2010 and 2011. Second, some of the prior months’ gains were probably artificially bolstered by good weather; private estimates put the effect at as much as 75,000 to 100,000 jobs. While it’s difficult to be certain, some of March’s disappointment was probably payback. Construction, for example, shed 7,000 jobs.

Third, and most important, there is no sign in other data of a sudden deceleration in economic momentum. Weekly claims for unemployment insurance continue to edge lower, the purchasing managers index for manufacturing showed activity accelerated a tad in March (as did the jobs data: factory payrolls rose a healthy 37,000). Nor do the fundamentals look that bad; the rise in petrol prices to date is smaller than last year’s, and the re-eruption of Europe’s sovereign debt crisis is so far on a lesser scale than in either last year or the year before. State and local government austerity is exercising less of a drag; their payrolls were little changed in March.

The third point (or second paragraph) is really the good news; other data points are still overall

However, remember, the rest of the world is slowing.  As the Australian Central Bank recently noted in its policy statement:

Recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year, but does not suggest that a deep downturn is occurring. Several countries in Europe will record very weak outcomes, but the US economy is continuing a moderate expansion. Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future. Conditions around other parts of Asia softened in 2011, partly due to natural disasters, but are not showing signs of further deterioration. Some moderation in inflation has allowed policymakers in the region to ease monetary policies somewhat. Commodity prices declined for a few months last year and are noticeably off their peaks, but have been relatively stable for a while now, at quite high levels. Australia’s terms of trade have peaked, though they remain high.
The European environment is also weaker than previously thought.   In short, the macro environment is such that the US must lead and it must lead from internally generated growth.