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.


Living in interesting times
(September 8, 2011)

“May you live in interesting times.” This may be a Chinese curse, but it is a blessing to an economist. After all, only when times are interesting do people look to economists for an explanation of what happened and a clue as to what will happen next. Unfortunately, economists generally do a much better job of explaining the past than they do forecasting the future. Nevertheless, that has never stopped economists from trying to forecast or others from asking them to do so.

At the moment, the major concern seems to be that the U.S. economy is heading back into another recession only two years into the current expansion. Such a retrenchment so soon after the last one is certainly possible but not probable. There just does not seem to be the case for a recession at the moment, including the disappointingly weak employment report for August reported last week. Given the high level of anxiety in financial markets about the economy at the moment, it is noteworthy to examine the August employment report in more detail. Recall that the employment report actually includes the results of two separate surveys—the establishment survey and the household survey. The establishment survey is used to generate a range of statistics on payroll employment, while the household survey is used to generate the unemployment rate.

I will start with the establishment survey. The first statistic discussed is the headline statistic from this survey—total nonfarm payroll employment. Total payroll jobs were unchanged in August, following a mere 85 thousand increase in July. Not only was the lack of new jobs in August disappointing, the job gain in July was revised downward from the initial estimate of 117 thousand.

Although the payroll jobs data failed to live up to expectations, it may be that expectations were too high based on other factors. Indeed, I contend that the lack of new payroll jobs in August was not as dire as many have claimed. Recall that nonfarm payroll jobs were depressed in August by 45 thousand due to the Verizon strike, which occurred during the reference week. In other words, total payroll jobs would have been up 45 thousand if it had not been for the strike. More importantly, private payroll jobs, which registered a gain of 17 thousand in August, following a gain of 156 thousand in July, would have been up 63 thousand if it had not been for the strike.

As it turns out, the 156 thousand new private sector jobs in July probably overstated the strength of the jobs market but the 63 thousand gain in August most likely understated it. A more accurate assessment of the jobs market is probably an average of the two months, or 110 thousand new jobs per month. Certainly this is not as stellar as might be preferred at this stage of the expansion, but it may be all we deserve given the changing demographics in the U.S. and the uncertainty about government policies, including monetary, tax, budget, regulatory and trade policies. Going forward, I would consider private sector job growth of 100 thousand to 120 thousand a month more than sufficient to sustain the current expansion.

The second labor statistic I want to discuss from the establishment survey is average hourly earnings, which declined 0.1% in August. This was only the second decline in this metric since the current expansion began. Obviously, consumer spending is the key to the expansion’s survival. Without gains in hourly earnings, the concern is that consumers will lack the purchasing power they need to spend. However, there are nuances of the average hourly earnings metric that make this somewhat counterintuitive to business cycles. This is best illustrated with a picture. As shown in Chart 1, it is not unusual for the year-over-year gain in average hourly earnings (a mere 1.8% in August) to decelerate following a recession, especially during the disinflation era from 1981 to the present.

This may have more to do with the composition of workers than whether they are getting pay raises. For example, early in an expansion, any boost in entry level jobs reduces the average hourly earnings. Although the net gain in jobs has been disappointingly slow, the turnover of jobs due to “Boomers” retiring may have helped lower average hourly earnings a bit more recently. As the economy approaches full employment, however, employers start bidding for experienced workers or pay a higher starting wage. This tends to cause the average hourly earnings to move up.

In other words, the sharp slowdown in average hourly earnings so far during the current expansion is not unusual at this stage of the business cycle. More importantly, it does not bode ill for the future of consumer spending or the survival of the expansion. Indeed, the longer expansions tend to experience a prolonged period of deceleration in average hourly earnings growth.

Also, the year-over-year percent gains in average hourly earnings tend to reflect the inflation rate in place at the time. This is clearly shown in Chart 1 when year-ago percent changes in average hourly earnings from 1965 to 1981 (a period of high and rising inflation) are compared to the year-ago percent changes from 1981 to 2010 (a period of low and falling inflation). Once the unemployment rate starts to come down, average hourly earnings most likely will start to drift higher.

With regard to the household survey, the unemployment rate was unchanged at 9.1% in August. Although this was still disappointingly high, it did not move higher as some had been expecting. Also, it remained at 9.1% despite a surge in the labor force. In fact, the number of employed persons increased 331 thousand in August, but only after employed persons fell 38 thousand in the prior month. In August, the number of employed persons was up 360 thousand from a year earlier. This compares to a gain of 1.26 million payroll jobs over the same twelve-month period. Clearly, employment as measured in the household survey needs to register solid monthly gains just to catch up to the number of total new jobs reported in the establishment survey. Although the two seldom track on a monthly basis, they do seem to track somewhat over a longer period.

I continue to believe that real growth in the U.S. will accelerate in the second half of 2011 and into 2012, albeit at a somewhat less robust pace than expected a month ago. Nevertheless, it still will be fast enough in my opinion to pull the unemployment rate lower and to increase payroll jobs by at least 100 thousand a month on average. period


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

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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

-- 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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