Economic Commentary
Daniel Laufenberg, Ph.D.

Numerous economic data series are released between the publication dates of the Laufenberg Economic Quarterly (LEQ). Therefore, this page is designed to provide commentary on the more recent data and their implications for the economic outlook.

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Making sense of the February jobs report
(March 10, 2013)

The Bureau of Labor Statistics recently reported that in February nonfarm payroll employment increased 236,000, versus a downward revised gain of 119,000 in January, and the civilian unemployment rate fell to 7.7%, compared with 7.9% in January. Both were much better than the consensus expected, but for the most part were not out of line with my expectations based on the latest Laufenberg Quarterly (LQ) forecast. For example, the LQ forecast expects the civilian unemployment rate to average 7.8% in the first quarter, which just happens to be where it stands at the moment (the average for January and February is 7.8%). Moreover, I noted that I thought payroll employment would total about 2.5 million this year, or roughly 200,000 per month. Over the last four months, the average monthly gain in jobs has been 205,000, but only 177,000 so far this year. Of course, all of this data is subject to major revisions, which could change the story in either direction.

Favorable news

For the most part, the February report was perceived to be very positive across the board. After all, job growth of 236,000, despite another decline in government jobs, was very encouraging for income and consumer spending. In this case, the index of hours worked increased a whopping 0.9% and average hourly earnings increased 0.2%, suggesting that the wages and salaries component of personal income increased over 1.0% last month. Wages and salaries represent over half of personal income. Thus, even after adjusting for inflation, personal income should register a sizable gain. This bodes well for consumer purchasing power over the remainder of the first quarter and into the second quarter. The one issue is the decline in government jobs, which will act as a mild drag on overall wages and salaries growth in February. Starting in March, this drag may become more substantial owing to the pay cuts and jobs losses associated with the sequester currently in effect.

Of course just because consumers earn income does not mean they will spend it immediately, especially if they are uncertain about the future. I contend that consumers are probably less uncertain about the future despite the policy shenanigans in Washington than they have been in quite some time.

Another positive aspect of the report is that industrial production probably will register a gain in February, following a decline in January. In particular, total hours worked in manufacturing, which climbed 0.8% in February, implies that factory output probably increased by a similar amount, assuming no improvement in productivity. If productivity increased in line with its recent trend, then the gain in factory output could be closer to 1.0%.

My interpretation of this report is that it implies real private sector growth of roughly 2.5% to 3.0% in the first half of 2013, which comports with the LQ forecast of average real gross domestic product (GDP) growth of 2.0% to 2.5% for the first half of 2013. Recall that government spending likely will detract markedly from real GDP growth again in 2013, especially in the first half. For that reason, I remain cautiously optimistic.

Less favorable news

Although I think it is too soon to declare my forecast that the economy will reaccelerate in 2013 as correct, it is also too soon to declare the end of the expansion as claimed by a few highly followed economists.1 The key to this pessimistic view is the slowdown in payroll job growth over the last year. This is seen in Chart 1, which plots the change in nonfarm payroll employment from a year ago. Based on this measure of job growth, the year‐ago gain in jobs peaked in early 2012 at about 2.4 million and has been trending lower ever since.

chart 1

Indeed, the February data was more of the same, as the year‐ago change in payroll employment slipped to 1.97 million from 2.00 million a month earlier. The argument is that if history is a guide, this is a precursor to a recession. Technically, this argument is correct. But what the proponents of this view fail to note is that this is a necessary but not sufficient condition for the U.S. economy to be in a recession. In other words, someday there will be another recession. I agree with this assessment as well. After all, business cycles have not been repealed, suggesting another recession will occur. The debate is in the timing. In particular, this condition of slower growth in payroll jobs (and in turn gross domestic income) can persist for a very long time before a recession begins.

Also, the recent slowdown in year‐ago job growth may reflect the hesitation on the part of business managers to fill vacancies in the wake of the tremendous amount of fiscal policy uncertainty most of last year. Indeed, more recent data suggest that job growth has reaccelerated. The problem is that the sequestration, if it remains in place much longer, will slow overall job growth once again. Private sector jobs may continue to increase, but government jobs most likely will not.

Nevertheless, I contend that there are several other necessary conditions that must be satisfied before a recession typically occurs, including an inverted government yield curve and the beginning of a bear market for equities. Instead, the yield curve is still steep (and likely will steepen further in the near term) thanks to the ongoing zero interest rate policy of the Fed and the major stock market indexes continue to hit new highs or very close to doing so.

Do not misunderstand. I think that we are closer to the next recession than we are to the last one, but that does not mean I think a recession is underway. My best guess at the moment is that it will not occur until 2015 at the earliest. Apparently one of the benefits of the “slow motion” recovery is that it helps delay the bottlenecks/excesses that typically derail expansions. And since the recovery has been unusually slow, it should be no surprise that the current expansion is now expected to last longer.

It is important that I provide a caveat to my outlook. I have a much better track record of predicting the start of recoveries than I do predicting the start of recessions. For those who have followed my work, you may recall that in 2007 I warned of a forthcoming recession, which I thought would be about normal in length and severity. But even a normal recession would have been more severe than anything most of us had experienced.

The problem was that I didn’t think the recession would start until 2009 (late 2008 at the earliest) and I didn’t expect it to be abnormally long and severe. According to the National Bureau of Economic Research (NBER), the group responsible for timing business cycles, the recession began in December 2007. On the other hand, I thought the recovery would begin in mid‐2009 and that it would be another “slow‐motion” recovery by historical standards but not as slow as either of the prior two recoveries. According to the NBER, the current recovery began in mid‐2009 (July to be precise) and it has been frustratingly slow. period

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1 One example is Lakshman Achuthan of the Economic Cycle Research Institute, who has appeared on CNBC recently claiming that the U.S. economy is in a recession.

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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.


2013 Commentary

Making sense of the February jobs report
(current article)
-- March 10, 2013

Growth gyrations continue
(current article)
-- January 28, 2013

2012 Commentary

Optimism, not irrational exuberance
-- October 15, 2012

Disappointing but far from disastrous
-- July 31, 2012

Assessing the recent weak economic data
-- June 8, 2012

Consensus too pessimistic about everything
-- April 16, 2012

Risks to the forecast
-- March 7, 2012

A good finish to 2011 but still not good enough
-- January 27, 2012

2011 Commentary

More evidence of a strong finish
-- December 22, 2011

Finishing Strong
-- October 14, 2011

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

2010 Commentary

What's going on?
-- October 15, 2010

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