Friday, September 3, 2010

Job Gains Providing a Ray of False Hope?

John Weisenthal of Clusterstock discussed his thoughts on Friday's job figures and put up an image of the scariest jobs chart ever (HT: Réal):

The key thing to realize about today's good jobs report is that it was only good relative to expectations. Private sector job creation of 67,000 is not that impressive in any real sense.

And indeed, the latest update of the scariest jobs chart ever from Calculated Risk -- which shows how deep these jobs losses are compared to past recessions -- shows this comeback still isn't anything like past comebacks, and it will be ages before we get back to even.

Private sector job creation is the key to any sustainable recovery, but as the chart above shows, you need to create a lot of jobs to repair the devastation since 2007. In that sense, today's figures are not that impressive, but one can only hope they're indicating better days ahead.

Phil Izzo of the WSJ provided reaction to today's figures from a number of economists:

It is a sigh of relief. The labor market in August was lethargic, but better than feared reducing the fears of a double-dip recession. Private payrolls went up 67,000 even though the overall nonfarm payroll fell 54,000 due to the census layoff. –Sung Won Sohn, Smith School of Business and Economics

The August employment report confirms the “Big Stall” rather than outright contraction in the economy… Saying the economy isn’t about to contract is not, unfortunately, the same thing as saying that growth momentum has returned. If anything, a read into the details of the report indicates the extent of the economy’s stall. The growth in private payrolls was confined to Healthcare & Social Assistance (which seems to go up every month regardless), temp workers plus construction — of which 10,000 of the 19,000 were returning strikers. Everything else summed to zero and all of these sectors reported numbers that were marginally on one side or the other of zero. –Steven Blitz, Majestic Research

The soft patch for jobs may have been extended for a fourth month today, but momentum in the economy is building and we can rule out a double-dip. –Christopher Rupkey, Bank of Tokyo-Mitsubishi

Government employment losses in August more than offset the gains in private-sector employment. Most of the drop in public-sector payrolls is explained by the departure of 114,000 temporary Census workers. However, state and local government payrolls also continued to shrink in August. Since the start of this year state and local public-sector payrolls have fallen 135,000, or almost 17,000 per month. These job losses are almost certainly linked to the expected end of federal fiscal relief under the Administration’s stimulus program. –Gary Burtless, Brookings Institution

Nonfarm [private] payrolls expanded by 67,000 in August… 67,000 jobs is just not enough and it cannot be spun otherwise. At the same time, the economy does continue to add a modest amount of jobs — since December 2009, private employment has increased by 763,000 jobs. This is not enough, especially so given the 8+ million jobs shed during the recession, but it is something. Given the increase in corporate profits among U.S. corporations, ongoing gains in payrolls should not be surprising. –Dan Greenhaus, Miller Tabak

In August, job creation occurred across a number of sectors, including health care, construction, mining, and temporary help services for professional and business services. Despite the decline in total jobs, this report was mildly positive, as private sector jobs helped alleviate some of the Census losses. A recovery is clearly underway, although it will be a slow one for the job market. –Jason Schenker, Prestige Economics

Construction employment registered an uptick for the first time since April. The nonres category accounted for all of the gain. This may be related to a ramping up of infrastructure projects. Manufacturing employment fell for the first time since December but this reflected a seasonal unwind of the rise in auto industry jobs that was evident in July. Moreover, the average workweek in the manufacturing sector ticked up 0.1 hours, so we see a manufacturing activity excluding motor vehicles up a sharp 0.8% in August –David Greenlaw, Morgan Stanley

Private payrolls increased by 67,000 last month, down from 107,000 in July. However, that apparent slowdown may just be an illusion. Employment at vehicle manufacturing plants jumped by 22,000 in July and then fell back by exactly the same amount in August. We suspect this is a distortion caused by the unusually small number of plant shutdowns this summer. Strip that out and private employment growth actually pick up a little bit last month. –Paul Ashworth, Capital Economics

It looks like the momentum in employment has been roughly steady in recent months at a modest pace that will not be enough to hold the unemployment rate steady. At current rates of labor force participation, the economy needs to generate 100,000 jobs to hold the unemployment rate steady. –Julia Coronado, BNP Paribas

Viewed in isolation, a 67,000 private payroll increase this far into the recovery is very poor. But viewed against low expectations and against fears that the economy may be tumbling into a double-dip recession, today’s report is good news. It suggests that the recovery may be wobbly but that it is still staggering forward. –Nigel Gault, IHS Global Insight

The fact that the labor market did not stall in August as many had feared suggests the recovery is sustained, if not robust. The increase in temp hiring suggests that employers, while suspicious about the strength of demand, see orders strong enough to justify taking on more help. The most recent Challenger report also suggests that companies have cut payrolls so deeply that any increase in demand will require more hiring. Businesses have squeezed as much as they can from their current workforces; once the economy gains some momentum, more permanent hiring is sure to follow. –Sophia Koropeckyj, Moody’s

Not a double dip, but still pretty anemic. So, stronger-than-expected, yes. Strong, no. –Stephen Stanley, Pierpoint Securities

The small amount of job gains during the past few months not only reflects the response to slow output growth, but also a lack of confidence going forward. While this expansion might seem similar to recent post-recession periods, it is in fact much different. The economy as a whole has been weakened by a dismal housing market and slow consumption, which especially hamper small and medium- sized enterprises. Modest gains in private sector jobs, coupled with the large decline in government employment, are consistent with our forecast for continued sluggish growth. –Bart van Ark, The Conference Board

The labor market has entered a holding pattern. After relatively mild improvements earlier this year, the key indicators of the strength of the labor market have shown virtually no improvement in recent months. The private sector has added an average of 78,000 jobs each month for the past three months, not nearly enough to begin to reduce unemployment. –Heather Boushey, Center for American Progress

Hourly earnings post their biggest rise since January of this year at 0.3% month-over-month, this translates into a 1.7% month-over-month in wages. Hours worked which are still low remained at 34.2; we would look for this to improve further before we started to see any real aggressive in additions to payrolls. Temporary help also resumes additions, we like this as a leading indicator as temporary workers are far more flexible and firms are more willing to take them on in the early stages of a recovery. In a labour force of 154 million, these increases are not going to set the world alight (or more importantly drive strong consumer spending), but people will take encouragement where their can find it especially heading into a holiday weekend. –David Semmens, Standard Chartered Bank

The largest increases in unemployment were among African Americans who saw their overall rate rise 0.8 percentage points to 16.3 percent, near the recession peak. The unemployment rate for black teens jumped 4.8 percentage points to 45.4%. Unemployment for Hispanics edged down to 12.0 percent, a full percentage point below its year-ago level. –Dean Baker, Center for Economic and Policy Research

Dean Baker is also predicting a 10% decline in house prices for the year and recently wrote this comment in counterpunch, Burning Down the House:

The howls of surprised economists were everywhere last week as the government reported on Tuesday that July had the sharpest single-month plunge in existing home sales on record. The next day the Commerce Department reported that new home sales hit a post-war low in July.

All the economists who had told us that the housing market had stabilized and that prices would soon rebound looked really foolish yet again. To understand how lost these professional error-makers really are it is only necessary to know that the Mortgage Bankers Association (MBA) puts out data on mortgage applications every week. The MBA index plummeted beginning in May, immediately after the last day (April 30) for signing a house sale contract that qualified for the homebuyers tax credit.

It typically takes 6-8 weeks between when a contract is signed and a house sale closes. The plunge in applications in May meant that homebuyers were not signing contracts to buy homes. This meant that sales would plummet in July. Economists with a clue were not surprised by the July plunge in home sales.

What should be clear is that the tax credits helped to pull housing demand forward. People who might have bought in the second half of 2010 or even 2011 instead bought their home before the tax credit expired. Now that the credit has expired, there is less demand than ever, leaving the market open for another plunge in prices. The support the tax credit gave to the housing market was only temporary.

It is worth asking what was accomplished by spending tens of billions of dollars to prop up the market for a bit over a year with these tax credits. First, this allowed millions of people to sell their home over this period at a higher price than would have otherwise been the case. The flip side is that more than five million people bought homes at prices that were still inflated by the bubble. Many of these buyers will see substantial loses when they resell their house.

The banks also had a stake in this. The homebuyers tax credit prevented prices from declining as rapidly as would have been the case otherwise. This allowed millions of homeowners to be able to sell their home at a price where they could pay off their mortgage. This made banks who could have been holding underwater mortgages very happy.

Of course someone had to issue the mortgage to all those people who bought homes at prices that are still inflated by the bubble. The overwhelming majority of the mortgages issued in the last year and a half are insured by the government, either through Fannie Mae and Freddie Mac, or through HUD. So, taxpayers are carrying the risk that further price declines will push these mortgages underwater, not banks or private investors.

The further plunge in house prices will have serious implications for the course of the recovery. By my calculations, the decline in house prices through the first half of 2009 eliminated $5-6 trillion of the $8 trillion of housing equity created by the bubble. Look to the further declines in the rest of this year to eliminate most or all of the remaining bubble equity.

The loss of this wealth will further dampen growth. This should drive home the fact that house prices, like the NASDAQ following the tech crash, are not coming back. Homeowners will have to come to grips with this massive loss of wealth. While many commentators (no doubt the surprised ones) complain that consumption is low, the reality is that consumption is still at an unusually high level relative to disposable income.

Furthermore, with a huge cohort of baby boomers approaching retirement with almost no wealth, there will be more need to save than ever. This need to save is accentuated by the plans of those in the Obama Administration and the congressional leadership to cut Social Security.

This means that we should expect consumption spending to weaken sharply in the second half of 2010 and into 2011 as the savings rate rises into the 8-10 percent range, further slowing economic growth. This comes against a backdrop where final demand had only been growing at a 1.2 percent average rate over the last four quarters.

Final demand is GDP, excluding inventories. Growth was boosted over the last year by the restocking of inventories. This process is largely completed, which means that we should expect GDP growth to be pretty much equal to final demand growth going forward.

Starting with a 1.2 percent growth rate, then throwing in weaker consumption due to further house price declines, state and local government cutbacks, and the winding down of stimulus, it is questionable whether growth will even remain positive over the next four quarters. Given all these negative factors, it is very hard to construct a story showing the economy on a healthy growth path, even though many economists still seem to think it is. Of course these economists were probably surprised by last month’s home sales data.

These are sobering thoughts from an economist who was among the first to predict the US housing crisis. Even if job creation picks up, it will do little to dent the fall in house prices. So while today's figures were better than expected, much more is needed to get the US economy back on solid footing. Below, I leave you with an overview of the August jobs report.

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