Sunday, August 8, 2010

The "Great Stall"?

The July US unemployment report gives more evidence of the Great Recession turning into the "Great Stall". After all the debate about the U-, V-, and W-shaped recoveries, it is now increasingly becoming clear that the recovery will be L-shaped.

The July the overall non-farm payroll employment fell by 131,000, because so many Census workers completed their work last month, and the unemployment rate was stagnant at 9.5%. Worryingly, private employers added a net of only 71000 workers. The US economy needs to add 100,000-150,000 jobs per month just to keep up with population growth.



The stationary unemployment rate despite the net decline in jobs can be attributed to people leaving the workforce and not looking for jobs. The broader definition of the unemployment rate, incorporating people who want jobs but did not search during the month, was also stuck at 16.5%. Another indication of the dark clouds on the horizon was the fact that temporary-help employment, considered a leading indicator for the overall labor market, declined.

Since the downturn began in December 2007, the economy has shed, on net, about 5.6% of its non-farm payroll jobs, without even accounting for the fact that the working-age population has continued to grow.



Of greater concern is the fact that government - federal, state and local governments - hiring is declining even without private jobs looking up. Apart from the large lay-off of federal census workers, the state and local governments cut 48,000 jobs in July. In the last three months, they have shed 102,000 jobs.



Though the average duration of unemployment, already the highest since the 1948, showed a slight decline to 34.2 weeks, there are doubts that it was due to some of the long-term unemployed merely giving up and dropping out of the labor force.



The broader economic growth signs too are not reassuring. Surveys, created by the Institute for Supply Management in the United States, and recreated in many other countries by Markit, intended to show whether conditions are improving or worsening, appears to indicate that the US economic environment has worsened over the past three months. In fact, the rebound in trade that bolstered world growth in late 2009 and early this year appears to have ended, leaving the manufacturing sector in many countries, including China, with the prospect of slower growth.



Inventory build-up since the second-half of 2009 has been a major contributor to the recent pick up in US GDP growth. Now, as the graphic below shows, the declining inventories mirror the flagging economic growth rates.



The US consumer spending too has shown no signs of picking up as evidenced in the small increases in retail sales. This comes even as reports indicate sharp increase in US consumer savings. In June, US consumers saved 6.4% of their after-tax income, in stark contrast to the 1-2% savings rate before the recession.



See this WSJ interactive graphic on the monthly variations in the US unemployment rates since 1948. Also economists' reaction to the jobs report. Calculated Risk calls it a weak report. See also this set of graphics from CR. Mark Thoma's assessment is here.

See also this article on the contrasting views of Jan Hatzius of Goldman Sachs and Richard Berner of Morgan Stanley on the prospects for the US economy and the risk of deflation.

In sharp contrast to the depressing fortunes of the US economy, across the Atlantic, Germany appears to making a smart recovery. The country’s unemployment rate at 7.6% is almost at the pre-crisis level, and is down from 9.1% in January.

Update 1 (3/9/2010)

Nouriel Roubini assigns a 40% probability to a double-dip recession in the US.

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