Economic Commentary
Daniel Laufenberg, Ph.D.

Numerous economic data series are released between the publication dates of the Laufenberg Economic Quarterly (LEQ). These commentaries are designed to provide insight on the more recent data and their implications for the economic outlook.

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A not so pleasant surprise!
(September 2, 2011)

The latest in the recent series of surprisingly weak economic data was the August employment report released this morning. The only good news in this report was that the unemployment rate remained at 9.1%. Every other aspect of the report, including no change in the level of payroll jobs, a shorter workweek, and a decline in average hourly earnings from a month earlier, was disappointing. In other words, there was very little in the headline statistics of this report to cheer about, even for a perennial optimist.

As a result, it now appears very unlikely that the U.S. economy will deliver a growth rate above 3.0% in the third quarter, as shown in my August forecast. In fact, many of the economists that were interviewed on the financial news channels following today’s data release suggested that real gross domestic product (GDP) would grow only about 1.0% in the current quarter, very similar to the revised pace in the previous quarter. Although I agree that the August jobs report was weak, it alone is not enough to cause me to completely abandon my forecast that real GDP growth will accelerate in the third quarter from its anemic pace in the first half of the year, but it does force me to reduce my enthusiasm.

Note that private sector jobs still registered a gain of 17 thousand in August (despite the Verizon strike detracting 45 thousand such jobs), following a gain of 156 thousand in July. Indeed, so far this year, private sector payroll jobs are up 1.16 million, whereas total nonfarm payroll jobs are up only 872 thousand. Clearly, governments, especially state and local governments, have been shedding jobs in an effort to balance their budgets.

The implications for real GDP growth in the third quarter is quite interesting. First, recall that real GDP grew a scant 0.7% at an annual rate in the first half of 2011 (0.4% in the first quarter and 1.0% in the second quarter). According to the latest estimate, real growth would have been twice as fast in the first half if it had not been for the drag on spending from the government sector (1.6% in the first quarter and 1.2% in the second quarter). Based on government employment through the first two months of the third quarter, it looks as if government spending will be a drag on real growth again albeit to a lesser degree than in the first half. Look for government spending to detract 0.1 percentage point from real GDP this quarter.

Second, consumer spending also looks to be at risk in August and September based on the employment report. Recall that spending in July increased sharply, causing some economists to revise their real GDP forecasts for the third quarter upward. However, the boost to spending in July may have been a one-off event, since all of the gain came from spending on durable goods and services. The jump in durable goods reflected motor vehicle sales in July. In August, vehicle sales were flat at best, suggesting that durable goods spending did not contribute much if anything to consumer spending last month. The surge in service spending primarily was due to unusually hot weather, resulting in a spike in spending on utilities by consumers last month. In other words, flat light vehicle sales and the return to more seasonable weather likely took the steam out of consumer spending in August. The conclusion is that there was nothing in the employment report that would suggest that real personal income less transfer payments increased enough to encourage consumers to boost their spending on nondurable goods in a meaningful way other than spending on back to school items. Even in this case, spending may have been delayed on the east coast because of Hurricane Irene and the earthquake in Virginia.

The first two items are from the expenditures side of the real economy. The last item applies to the output side. In particular, total hours worked declined 0.2% in August owing to a shorter average workweek, following an increase of 0.1% increase in July. The implication is that total hours worked, in the absence of a sharp rebound in September, are on track to decline in the third quarter at an annual rate of about 0.4%.

On balance, this does not bode well for output growth in the third quarter, since changes in output are due to the sum of changes in hours worked and productivity. Of course, this relationship was not very helpful in the second quarter, when total hours worked increased 3.5% at an annual rate and real GPD increased only 1.0%.

However, based on percent changes from a year ago, the change in total private hours worked seems to track real GDP growth better but still not perfectly (see Chart 1). With this shortcoming in mind, real GDP in the second quarter was up 1.5% from a year ago, while the index of total hours worked was up 2.1% over the same period. More recently, total hours worked in August were up only 1.6% from a year earlier. At first blush, this too does not bode well for output growth in the third quarter, except that on a rolling year-ago basis, the quarter that will be deleted from the calculation of real GDP growth from a year ago is the third quarter of 2010, when real GDP grew 2.5%. In other words, for real GDP to stay around 1.5% on a year ago basis, it must increase about 2.5% at an annual rate in the third quarter. From all indications, including the hours worked index, private sector employment, and government employment through the first two months of the third quarter, I still think such an outcome is doable. period

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For the current economic forecast, as well as other analysis and commentary, please visit the Stonebridge Capital Advisors website.

Dlaufenberg@stonebridgecap.com

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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.


2011 Commentary

Living in interesting times
-- September 8, 2011

A not so pleasant surprise!
-- September 2, 2011

Surprise!
-- August 16, 2011

Debt ceiling politics
-- July 25, 2011

Q2 growth: Another disappointment likely
-- July 14, 2011

Interpreting the ISM manufacturing index and the employment situation report for May
-- June 4, 2011

A slower start to 2011 than anticipated earlier
-- April 14, 2011

Is the dollar's status as the reserve currency at risk?
-- March 21, 2011

More trouble in the Middle East
-- February 26, 2011

Searching for the next debt crisis
-- January 13, 2011

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