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Halfway to Nowhere
Economic activity fared a little better than many feared in the third quarter with GDP
advancing at an estimated rate of 2% to 2½%. But growth remains too slow to
reduce unemployment or provide much lift to consumer confidence.
Cyclical forces in the form of pent-up demand have been enough (with policy
support) to keep recovery going. Following earlier news of strong business
investment, solid auto sales in September provide the latest evidence that
temporary drags associated with supply line disruptions last spring may have
exaggerated signs that growth was faltering.
Modest monthly private sector job gains averaging 117,000 in the third quarter have
further allayed worries about a new down leg. But cutbacks in state and local
employment and stagnant construction and financial sector hiring present lingering
obstacles to a healthy labor market. Although unemployment has steadied of late,
household employment gains have centered on part-time work, while measures of
long-term unemployment continue to worsen.
Initial readings on the economy’s performance in September have not bridged the
divide in views about the outlook. Overall growth in the third quarter appears to
have picked up a little to a 2%-2½% range based on data in hand. This was a
period that some thought might usher in the start of a new recession. But these
gains owe much to the reversal of temporary drags on recovery in the first half,
while the financial supports for growth have since weakened noticeably. Although
there was a flurry of optimism this week that European authorities may be better
prepared to head off catastrophe, we are a long way from viewing the balance of
risks there to the upside.
In the current environment, the distinction between recession and no recession may
be a false one in our judgment. Even if the economy has skirted renewed
contraction, activity is not expanding quickly enough to absorb normal growth in the
labor force and prevent an upward creep in unemployment. The key distinction may
be how the economy is progressing relative to sustainable trends rather than zero
growth. Unemployment will tend to rise or fall depending on whether growth is
below or above its potential (Figure 1). That may explain why a majority of
consumers in polling remains skeptical about recovery. In per capita terms, GDP is
about where it was five years ago, leaving the U.S. halfway to a lost decade.
Barring severe financial contagion from Europe, however, we think U.S.
developments will continue to reflect a tug of war between cyclical forces favoring
recovery and the lingering drags from the financial crisis that are not easing up. As
discussed last week, the long recession created a backlog of pent-up needs in
business spending and big-ticket consumer goods. Where policy has been relatively
more effective at providing stimulus for renewed demand, there have been
encouraging rebounds. Business spending on equipment and software has carried
more than its share of growth in the early recovery and shipments data point to
sharp double-digit gains in Q3.
Likewise, September light vehicle sales surprised to the high side this week at a
13 million annual rate, one of the best showings of recovery to date (Figure 2). The
bounce suggests that bad weather may have held down the previous month and
that an important element of discretionary spending is advancing. The revival in the
auto sector had been a relative bright spot and the latest news suggests the
letdowns earlier this year were the temporary result of lost output from the Japan
earthquake. These data raise questions about the predictive value of weak
confidence in recent months.
The cyclical backdrop might also be providing some implicit backstop to the extent
that slow growth probably has prevented any significant new imbalances that might
supercharge the effects of a major shock. We wouldn’t overemphasize this point
because any serious blow to financial conditions would likely destroy wealth, raise
capital costs and hasten higher savings rates and a retreat from risk-taking. Still,
there is some protection to the downside for companies that have not overexpanded,
over-hired or over-produced in part because they have sought this
protection from downside risk. The run-rate of inventory investment economywide,
for example, is still in a relatively low range despite the massive cutbacks during the
recession (Figure 3), and even slow final sales have translated to subdued
inventory/sales patterns (Figure 4).
Although this perspective suggests recovery is not without some upside, the lesson
of 2011 is that economic headwinds are proving more persistent barriers to a more
robust expansion. Folding in our estimate of third-quarter growth, GDP has
expanded by just 5½% in the two years plus since growth resumed. That compares
with an average of 10% growth for the comparable stretches of four major business
cycles (excluding the aborted recovery of 1980) dating back to the mid-1970s. That
shortfall has translated into lagging job growth in areas relatively unscathed by
structural obstacles (Figure 5). The cumulative rise in employment across
expanding private industries has amounted to 2 million compared to an historical
average of 3 million.
The more glaring shortfall has been among those sectors at the center of the
economy’s restructuring (Figure 6). The combination of the severe housing
downturn and a financial crisis is still inflicting stresses that are pressuring balance
sheet repair, hampering credit access and delaying a new construction cycle.
Although payroll employment for construction and financial activities has stopped
contracting for some time, the gap versus historical norms is nearing 1 million jobs.
While modest job growth elsewhere has buoyed apartment building and rents that
could be a back door to broader stabilization, this process could take years.
Ongoing retrenchment among state and local governments is an even more serious
headwind as budget strains persist and federal assistance is being reduced. This
sector can typically contribute roughly a quarter point to GDP growth but is instead
pulling growth down by about that same amount. Employment losses in this sector
have shown no let up and the latest Challenger announcements of prospective job
cuts surged to 54,000 in September. Employment in this lagging sector did not peak
until three quarters after private sector employment and since overall job growth
resumed in early 2010, state and local governments have shed 437,000 jobs.
Against this backdrop, this morning’s news that strike-adjusted employment rose by
a slim 58,000 in September reinforced the impression that recovery is limping along
and that labor markets remain exceptionally weak. However, the thrust of the report
challenges the view that growth was faltering altogether when confidence plunged
earlier in the quarter (front page chart). July and August payrolls were revised up
by a cumulative 99,000 and both private hiring and public job cuts netted out a little
better than we anticipated for September. We suspect hurricane-related recovery
efforts might have contributed slightly last month. In the household survey,
employment posted a second sizable gain of nearly 400,000 and both the
participation rate and the employment/population ratio rose.
While these numbers provide a pleasant surprise for financial markets where
sentiment has turned unusually downbeat, the ongoing theme in these reports is a
labor market in crisis as growth continues to undershoot and structural challenges
fester. Nearly 45% of the unemployed have been out of work for more than six
months while the average duration of unemployment has now risen to a new record
high of 40.5 weeks (Figure 7). The number of people working part-time for
economic reasons has topped 9.25 million again, a level exceeded only once and
that was earlier in this recovery (Figure 8). Roughly half of the past two months’
gains in household employment have been among workers who could only find
part-time work.
On balance, the incoming data have provided some relief that the economy has not
fallen back into recession and that cyclical forces are helping to support modest job
gains despite structural headwinds. But the recovery remains disappointing and the
more persistent areas of weakness such as the state and local retrenchment
continue unabated. The latter underscores concern that fiscal belt tightening at the
federal level could further restrain an already anemic recovery if is focused too
narrowly on short-term deficit reduction instead of long-term reforms.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Halfway to Nowhere
Economic activity fared a little better than many feared in the third quarter with GDP
advancing at an estimated rate of 2% to 2½%. But growth remains too slow to
reduce unemployment or provide much lift to consumer confidence.
Cyclical forces in the form of pent-up demand have been enough (with policy
support) to keep recovery going. Following earlier news of strong business
investment, solid auto sales in September provide the latest evidence that
temporary drags associated with supply line disruptions last spring may have
exaggerated signs that growth was faltering.
Modest monthly private sector job gains averaging 117,000 in the third quarter have
further allayed worries about a new down leg. But cutbacks in state and local
employment and stagnant construction and financial sector hiring present lingering
obstacles to a healthy labor market. Although unemployment has steadied of late,
household employment gains have centered on part-time work, while measures of
long-term unemployment continue to worsen.
Initial readings on the economy’s performance in September have not bridged the
divide in views about the outlook. Overall growth in the third quarter appears to
have picked up a little to a 2%-2½% range based on data in hand. This was a
period that some thought might usher in the start of a new recession. But these
gains owe much to the reversal of temporary drags on recovery in the first half,
while the financial supports for growth have since weakened noticeably. Although
there was a flurry of optimism this week that European authorities may be better
prepared to head off catastrophe, we are a long way from viewing the balance of
risks there to the upside.
In the current environment, the distinction between recession and no recession may
be a false one in our judgment. Even if the economy has skirted renewed
contraction, activity is not expanding quickly enough to absorb normal growth in the
labor force and prevent an upward creep in unemployment. The key distinction may
be how the economy is progressing relative to sustainable trends rather than zero
growth. Unemployment will tend to rise or fall depending on whether growth is
below or above its potential (Figure 1). That may explain why a majority of
consumers in polling remains skeptical about recovery. In per capita terms, GDP is
about where it was five years ago, leaving the U.S. halfway to a lost decade.
Barring severe financial contagion from Europe, however, we think U.S.
developments will continue to reflect a tug of war between cyclical forces favoring
recovery and the lingering drags from the financial crisis that are not easing up. As
discussed last week, the long recession created a backlog of pent-up needs in
business spending and big-ticket consumer goods. Where policy has been relatively
more effective at providing stimulus for renewed demand, there have been
encouraging rebounds. Business spending on equipment and software has carried
more than its share of growth in the early recovery and shipments data point to
sharp double-digit gains in Q3.
Likewise, September light vehicle sales surprised to the high side this week at a
13 million annual rate, one of the best showings of recovery to date (Figure 2). The
bounce suggests that bad weather may have held down the previous month and
that an important element of discretionary spending is advancing. The revival in the
auto sector had been a relative bright spot and the latest news suggests the
letdowns earlier this year were the temporary result of lost output from the Japan
earthquake. These data raise questions about the predictive value of weak
confidence in recent months.
The cyclical backdrop might also be providing some implicit backstop to the extent
that slow growth probably has prevented any significant new imbalances that might
supercharge the effects of a major shock. We wouldn’t overemphasize this point
because any serious blow to financial conditions would likely destroy wealth, raise
capital costs and hasten higher savings rates and a retreat from risk-taking. Still,
there is some protection to the downside for companies that have not overexpanded,
over-hired or over-produced in part because they have sought this
protection from downside risk. The run-rate of inventory investment economywide,
for example, is still in a relatively low range despite the massive cutbacks during the
recession (Figure 3), and even slow final sales have translated to subdued
inventory/sales patterns (Figure 4).
Although this perspective suggests recovery is not without some upside, the lesson
of 2011 is that economic headwinds are proving more persistent barriers to a more
robust expansion. Folding in our estimate of third-quarter growth, GDP has
expanded by just 5½% in the two years plus since growth resumed. That compares
with an average of 10% growth for the comparable stretches of four major business
cycles (excluding the aborted recovery of 1980) dating back to the mid-1970s. That
shortfall has translated into lagging job growth in areas relatively unscathed by
structural obstacles (Figure 5). The cumulative rise in employment across
expanding private industries has amounted to 2 million compared to an historical
average of 3 million.
The more glaring shortfall has been among those sectors at the center of the
economy’s restructuring (Figure 6). The combination of the severe housing
downturn and a financial crisis is still inflicting stresses that are pressuring balance
sheet repair, hampering credit access and delaying a new construction cycle.
Although payroll employment for construction and financial activities has stopped
contracting for some time, the gap versus historical norms is nearing 1 million jobs.
While modest job growth elsewhere has buoyed apartment building and rents that
could be a back door to broader stabilization, this process could take years.
Ongoing retrenchment among state and local governments is an even more serious
headwind as budget strains persist and federal assistance is being reduced. This
sector can typically contribute roughly a quarter point to GDP growth but is instead
pulling growth down by about that same amount. Employment losses in this sector
have shown no let up and the latest Challenger announcements of prospective job
cuts surged to 54,000 in September. Employment in this lagging sector did not peak
until three quarters after private sector employment and since overall job growth
resumed in early 2010, state and local governments have shed 437,000 jobs.
Against this backdrop, this morning’s news that strike-adjusted employment rose by
a slim 58,000 in September reinforced the impression that recovery is limping along
and that labor markets remain exceptionally weak. However, the thrust of the report
challenges the view that growth was faltering altogether when confidence plunged
earlier in the quarter (front page chart). July and August payrolls were revised up
by a cumulative 99,000 and both private hiring and public job cuts netted out a little
better than we anticipated for September. We suspect hurricane-related recovery
efforts might have contributed slightly last month. In the household survey,
employment posted a second sizable gain of nearly 400,000 and both the
participation rate and the employment/population ratio rose.
While these numbers provide a pleasant surprise for financial markets where
sentiment has turned unusually downbeat, the ongoing theme in these reports is a
labor market in crisis as growth continues to undershoot and structural challenges
fester. Nearly 45% of the unemployed have been out of work for more than six
months while the average duration of unemployment has now risen to a new record
high of 40.5 weeks (Figure 7). The number of people working part-time for
economic reasons has topped 9.25 million again, a level exceeded only once and
that was earlier in this recovery (Figure 8). Roughly half of the past two months’
gains in household employment have been among workers who could only find
part-time work.
On balance, the incoming data have provided some relief that the economy has not
fallen back into recession and that cyclical forces are helping to support modest job
gains despite structural headwinds. But the recovery remains disappointing and the
more persistent areas of weakness such as the state and local retrenchment
continue unabated. The latter underscores concern that fiscal belt tightening at the
federal level could further restrain an already anemic recovery if is focused too
narrowly on short-term deficit reduction instead of long-term reforms.
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