This piece was originally written for Encima Global.
Consumption data improved a bit in September, but income growth, business investment and hiring have remained weak. We expect a 2% initial reading on third quarter GDP growth due October 26 versus the revised 1.3% rate in the second quarter. Under current economic policies, we expect weak GDP and job growth to continue into the fourth quarter, with downside risks in 2013 as the U.S. tax increase takes shape, the national debt burgeons and Europe extends its downturn.
- Today’s initial jobless claims data for the week ended October 13 jumped to 388,000. This increased the four-week moving average to 365,500, which is consistent with 2012’s slow growth environment. Claims had dropped to 339,000 in the previous week’s data (revised up to 342,000 today.) The Labor Department said last week that the drop related to “a seasonal anomaly” in one state’s data. Today’s release showed that California’s initial claims in the October 6 report had been only 45,000, which was a 36% decline versus a 10-20% decline in other big states. Bottom line: California’s October filings with the Department of Labor didn’t fit the expected seasonal adjustment pattern, causing a big swing down and then up in the seasonally adjusted claims data. We think the four-week moving average gives an accurate assessment of the weak labor conditions.
Looking beyond short-term data variations, a wide range of labor data is showing a relatively consistent picture of weak economic growth and slow improvement in labor conditions.
- The Labor Department’s monthly report on job openings and labor turnover (the Jolts report) showed 3.56 million job openings in August, below the levels needed to push the unemployment rate down. The Labor Department’s most recent quarterly report on business dynamism showed that gross job gains in the fourth quarter of 2011 were 6.9 million or 6.3% of total employment, a rate that is well below the 8% rate in the 1990s. We note several possible causes for the reduction in business dynamism: uncertainty over health care, the Fed’s channeling of capital to the government and big companies, the weakness in housing and, above all, the weakness in the labor market.
- The NFIB small-business survey found that hiring plans fell to 4 in September from 10 in August and a normal 15-20 reading during previous expansions. The current level is consistent with the recessions of 1990 and 2001. The employment index in the ISM manufacturing report rose to 54.7 in September, an improvement from 51.6 in August and 52.0 in July. However, in the ISM non-manufacturing report, which represents a much larger segment of the economy than manufacturing, the employment index fell to 51.1 in September, reflecting slow economic growth, from 53.8 in August.
- The establishment survey shows 2.0 million net new jobs over the last year (including the upward benchmark adjustment) versus 2.7 million in the household survey. All of the stronger reading in the household survey can be explained by the 941,000 increase since March in people working “part-time for economic reasons.” That number jumped 582,000 in September alone, causing a political debate over under-employment and the reliability of the data. The gain in jobs that are “part-time for economic reasons” helped lower the headline unemployment rate to 7.8% in September, but left the U6 under-employment rate high at 14.7%. The number of under-employed workers reached 23.2 million in September, up from a recent low of 22.7 million in March and 23.1 million in August. The peak was 26.8 million in October 2009. The September total included 12.1 million unemployed, 8.6 million employed part-time due to economic conditions (and wanting more hours) and 2.5 million marginally attached to the labor force (meaning they’ve looked for work in the last year but not in the last month.) Private sector payrolls in the establishment survey have risen 2.1 million in 12 months, consistent with the 2.2 million 12-month gain in the ADP survey. The household survey data shows more volatility than the establishment survey given the smaller sample in the household survey and the effort to include jobs that are part-time due to the weak economy.
- Employment in the establishment survey is up 4.3 million from the February 2010 bottom. Employment in the household survey (used in the calculation of the unemployment rate) has risen 4.8 million since the December 2009 bottom when the unemployment rate was at 9.9%. This job gain plus weak growth in the labor force allowed the unemployment rate to fall to 7.8% in September. If the labor force had followed the historical pattern of rising with population, it would be at roughly 160 million rather than 155.1 million, putting the unemployment rate at 10.6%. Part of the slow growth in the labor force and the decline in the participation rate is related to disappointment over the weak labor environment. Another part is due to demographics as the baby boom begins to retire in larger numbers. From 2000 to 2020, the population age 55-64 will have grown by 19.3 million, with many exiting the labor force. In contrast, the 15-54 population will only have grown 12.1 million. The swing is unfavorable for tax receipts and employment growth, but will tend to hold down the unemployment rate.
- The Labor Department’s two employment surveys for October will be released November 2 prior to the election. As with today’s initial claims report, the surveys will probably show a slow-growth result. The establishment survey should improve some from the weak 114,000 September result while the household survey will probably reverse some of the strong 873,000 September result. The household survey has shown very strong gains in jobs that are “part-time for economic reasons” in each of the last three Septembers: 579,000 in 2010, 483,000 in 2011 and 582,000 in 2012. The big gains in 2010 and 2011 were followed by large job losses in October: 419,000 in 2010 and 480,000 in 2011. That pattern will probably be repeated to an extent in October 2012.
Bottom line: We think the data is showing a relatively consistent picture of slow growth in GDP and employment. We expect both to be affected by year-end policy decisions regarding U.S. tax increases and the attractiveness of the business climate for new investments and hiring.
David Malpass is President of Encima Global and Chairman of GrowPac.com’s Stop the Fed campaign.