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Jobless Claims – Is the Recession on its Last Legs?

Thu, Sep 4 2008, 21:10 GMT
by Asha Bangalore

Northern Trust

Jobless Claims – Is the Recession on its Last Legs?

The National Bureau of Economic Research has yet to announce whether or not the U.S. economy is experiencing a recession. Two consecutive quarters of declines in real GDP have not been reported. But, there have been two quarterly dips in the gross domestic income (GDI). And then there are the naysayers denying the possibility of a recession, particularly after the revised 3.3% jump in real GDP in the second quarter. And here comes along initial jobless claims data of actual people filing for unemployment insurance, published every Thursday, proclaiming that the labor market remains in a recession-like situation. For the week ended August 30, initial jobless claims rose 15,000 to 444,000 after recording three consecutive weekly declines summing to a total of 31,000. The declines occurred following a jump in initial jobless claims arising from the extended unemployment benefit program. The latest increase in jobless claims indicates that the correction is behind us with the softness in labor market conditions persisting. The weekly tally of initial jobless claims and the four-week moving average (438,000) are both currently at levels matching readings last seen toward the end of the 1990-1991 and 2001 recessions.

Continuing claims, which lag initial claims by one week, rose 6,000 to 3.435 million and the insured unemployment rate held steady at 2.6%. The weekly count of continuing claims and the 4-week moving average (3.400 million) both match levels posted at the closing phase of the 1990-1991 and 2001 recessions (see chart 2). The levels of initial jobless claims and continuing claims numbers are troubling to the extent that further gains are distinctly possible in the months ahead because adjustments from the credit crunch and housing market crisis are ongoing. In other words, the recession is certainly not on its last legs.

ISM Non-Manufacturing Survey: Export Orders Index Drops to Cycle Low

The ISM Non-Manufacturing Survey results for August show a small improvement in the composite index. In August, the index moved up to 50.6 from 48.5 in July. The largest positive contribution was from supplier deliveries (55.5 vs. 53.5 in July). The new orders index (49.7 vs. 47.9 in July) and the employment index (45.5 vs. 47.1 in July) remain below 50.0, while the business activity index (51.6 vs. 49.6 in July) rose above 50.0. Readings above 50.0 denote an expansion in activity.

The new export orders index fell to 44.5 in August from 47.5 in July. The latest reading is a cycle low mark and matches the level seen in October 2001 when the economy was in a recession. The export orders index is an indication that exports may not give a lift to headline real GDP in the second-half of 2008 to the extent seen in the first-half of the year.

Unit Labor Costs Imply Inflationary Threat from Labor Market Is Absent

Productivity of the U.S. economy grew 4.3% in the second quarter after a 2.6% increase in the first quarter. This sharp upward revision was expected given the upward revision of the GDP estimate. On a year to-year basis, productivity moved up 3.4% in the second quarter.

Unit labor costs fell 0.5% in the second quarter compared with a 1.2% increase in the first quarter. From a year ago, unit labor costs have risen 0.6% (see chart 6) in the second quarter. The peak of unit labor costs in the current business cycle appears to have occurred in the first quarter of 2007 (+4.2%). The noticeable downward trend of unit labor costs (see chart 6) supports expectations of a moderation in inflation and also underscores that wages are not an inflationary threat at the present time.

Sweden’s Riksbank Hikes One More Time

With the economy slowing rapidly but headline inflation well above the upper limit of the central bank’s target in recent months, it was a close call whether Sweden’s Riksbank (the central bank) would raise its repo rate again this month. In the event, the bank opted for one more bout of tightening, taking the rate up 25bps to 4.75%, while also making it clear that this is likely to be the last rate hike for this cycle.

The Riksbank targets headline inflation of 2.0% over a two-year forecast horizon, and has now raised its repo rate a total of thirteen times since early 2006. The bank said this morning that this final move was needed to prevent the high inflation of recent months from becoming entrenched – but in the next breath said that lower prices of oil and other commodities, along with weaker growth forecasts for Sweden and overseas, warrant a looser policy going forward than previously forecast. Back in July, the central bank had anticipated a quarterly-average repo rate of 4.8% in Q4 2008, rising to 4.9% in Q3 2009. Today’s projection foresees an average Q4 rate of 4.7%, easing to 4.6% in July-September 2009. In other words, the next policy shift is likely to be a rate cut sometime after the middle of next year.

Headline inflation hit an annual 4.4% in July, its highest level in nearly 15 years, but may have peaked. The August reading of household inflation expectations from the National Institute of Economic Research (NIER) – reportedly closely watched by the Riksbank – came down nearly one full percentage point to 2.9%.

Meanwhile, the economy does show every indication of a rapid cooling. Real GDP growth was essentially flat on the quarter in Q2 and rose just 1.0% y-o-y – its weakest showing since 2001. This morning, the Riksbank slashed its growth forecasts, anticipating real GDP of 1.4% this year and 0.8% in 2009, down from the July forecasts of 2.1% and 1.2%, respectively. This is even gloomier than the NIER, which last month lowered its growth forecast for this year to 1.7% (previously 2.4%) and for 2009 to 1.4% (previously 2.0%). The NIER noted “a rapid economic slowdown in the OECD area, which receives 80% of Swedish exports” as well as lower domestic demand.

Last week, the NIER reported that its index of economic sentiment fell to 85.5 points in August from 88.5 in July. The consumer confidence index remained well into negative territory at a seasonally-adjusted -19.6 (-18.4 in July) and the manufacturing confidence index slid further downward, to -12 (-10 in July).

Earlier this week came the news that the Sif-Swedbank purchasing managers’ index dropped further below the growth-contraction mark of 50.0 in August, coming in at a seasonally-adjusted 46.4 (48.6 in July), as production, orders, and employment all fell. The weak PMI report makes it highly likely that the NIER manufacturing confidence indicator for September will decline yet again.

The government has said it is working on a stimulus package, with details to be included in the 2009 budget release sometime in the next few weeks. August inflation is due on September 9. The minutes from this week’s policy meeting will be published September 17, while the next policy decision from the Riksbank is due October 23.

ECB On Hold But Still Worried About Inflation

As expected, the European Central Bank (ECB) left its refi rate at 4.25% again this month. Of more interest was the post-meeting press conference from Governor Trichet. He noted that there are downside risks to growth but also said there is reason to hope that global growth will remain resilient. The Governor spent more time discussing the ECB’s concerns about “broad-based second round effects.” He emphasized that the ECB is “determined” to keep medium-term inflation expectations in line with its price stability goal of consumer price inflation below but close to 2 percent, and that the current monetary policy stance “will contribute to achieving our objective." In a signal that the ECB is unlikely to change interest rates for some time, he added that the Governing Council had no bias.

Alongside today’s policy meeting, the ECB staff economic projections were released. As expected, the inflation forecast was revised up while the growth forecast was revised down. The annual rate of EU-harmonized inflation is now expected to average 3.4-3.6% this year, slightly up from the June outlook of 3.2-3.6%, with 2009 inflation at 2.3-2.9% (1.8-3.0% previously). Real GDP for this year has been revised down to just 1.1-1.7% (1.5-2.1% in June), and 0.6-1.8% next year (down from the earlier 1.0-2.0%).

German Manufacturing Orders Drop Again

German manufacturing orders fell a seasonally-adjusted 1.7% on the month in July, the eighth consecutive monthly contraction, adding to fears that the largest economy in the Euro-zone is headed for a recession.

While orders tend to be volatile month-to-month, not since 2002 has Germany seen more than two consecutive quarters of negative growth. Although foreign orders overall did not fare quite as badly, eking out growth of 0.3% on the month (-4.5% in June), that was thanks to an up-tick in Euro-zone orders. Outside the Euro-zone, however, orders dropped 5.7% on the month. Interestingly, the other significant source of contraction was non-Euro-zone capital goods orders. While overall capital goods orders slipped 2.4% (-3.3% in June), non-Euro-zone orders plunged -10.6%.

On a two-month comparison, which smoothes out some of the volatility, June-July manufacturing orders overall were down 4.0% on April-May, with non-Euro-zone foreign orders falling 6.5% and overall capital goods orders dropping 5.9%. Could it be that capital goods demand from some of the powerhouse emerging markets is finally starting to ease back? Either way, the prognosis for German Q3 GDP growth is looking softer by the day.

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Published on  Thu, Sep 4 2008, 21:18 GMT