U.S. Review
Falling Revenues Fuel Layoffs
Employment losses have deepened considerably in recent months and revisions to previously published data suggest that total job losses for this recession will now top 6.5 million. Nonfarm employment plunged by 598,000 jobs in January and the unemployment rate rose 0.4 percentage points to 7.6 percent. Both numbers were slightly worse than consensus estimates.
The January employment data also included revisions to previously published data going all the way back to April 2007. The new figures bring total job losses to slightly over 3.5 million since employment peaked in December 2007. The heaviest losses by far have occurred during the past five months, a period during which nominal GDP has been negative.
Nominal GDP reflects the volume of goods and services produced throughout the economy and the price at which they were sold. In short, nominal GDP is the revenue of the entire economy. With total revenue declining at its worst pace since the late 1950s, many businesses and governments are in survival mode and have no choice but to cut jobs.
Widespread Job Losses Should Continue in Early 2009
Job losses continue to be exceptionally broad based. Virtually every major industry category shed jobs in January, a trend that has become all too common. The heaviest job losses continue to be in the goods sector, where construction firms shed 111,000 jobs in January and factories cut 207,000 positions. Some of the largest cutbacks were in the motor vehicle sector, where extended plant shutdowns led to huge drops in employment and hours worked. Other areas with particularly large cutbacks in January include fabricated metals and industrial machinery. In all, durable goods producers slashed 157,000 jobs in January accounting for just over three-fourths of the loss in manufacturing jobs.
Cutbacks in the durable goods sector are likely to continue. Factory orders declined more than expected in December. Overall orders fell 3.9 percent, following declines of 6.5 percent in November and 6.0 percent in October. Orders for non-defense capital goods excluding aircraft were down 6.3 percent in December and plunged at a 34.1 percent annual rate over the past three months. Shipments for this same key category fell at less than half that pace, declining at a 14.9 percent pace, indicating that further production cutbacks will be needed to bring production and inventories back in line with demand.
There was very little cheer in this week’s other economic reports. Weekly first time unemployment claims rose by 35,000 to 626,000 in late January, suggesting that February’s employment data will once again post a hefty drop. Unemployment will also likely trend higher from January’s 7.6 percent.
Motor vehicle sales came in lower than expected, with cars and light trucks selling at just a 9.6 million unit annual rate. That pace was more than half a million units below the consensus estimate and marked the weakest pace for motor vehicle sales since 1982. The weakness in sales will make it even more difficult to clear out bloated inventories of domestic and imported vehicles, which means declines in production and imports will likely extend for a few more months.
The only good news this week is that nonfarm productivity rose at a 3.2 percent annual rate during the fourth quarter, as businesses slashed ‘hours worked’ at an even faster rate than output declined. While stronger productivity is a generally a good thing, much of the recent gain is likely coming out of necessity. Moreover, the flip side of this report is that businesses have been slashing jobs and hours worked. While these cutbacks are a necessary evil in a capitalist society, they are a very bitter pill to swallow.
Global Review
Further Monetary Easing Abroad
A number of major central banks held policy meetings this week and some, but not all, cut rates further. The Reserve Bank of Australia (RBA) kicked things off on Tuesday by slashing its policy rate by 100 bps, bringing the total amount of easing since September to 400 bps (see chart at left). Commodity exports are important to the Australian economy, and the deep global recession that is in train will surely exert a slowing effect on economic activity down-under. The RBA is cutting rates to cushion the blow to the domestic economy.
Despite the deep global downturn, the Australian economy appears to be holding up better than most other major economies, at least so far. For example, retail sales in Australia shot up 3.8 percent in December from the previous month, bringing their year-over-year rise to a respectable 5.6 percent. (In contrast, total retail spending in the United States plunged 9.8 percent in December.) Tax rebates that were legislated last autumn helped to boost Australian retail sales in December. But that’s exactly the point. Australian policymakers (both monetary and fiscal) are taking aggressive steps to stimulate the economy. Although Australia may yet slip into recession, the downturn down-under probably will be less severe than in most other major economies.
As widely expected, the Bank of England cut its policy rate by another 50 bps on Thursday. In its statement announcing the move, the Bank said that output thus far in the first quarter continues to contract at a very sharp rate. Indeed, real GDP in the fourth quarter declined at an annualized rate of 5.9 percent, the sharpest rate of contraction since the very deep recession of the early 1980s. As shown in the top chart, the purchasing managers’ indices for the manufacturing, construction and service sectors all edged a bit higher in January. That said, the indices remain in territory that is consistent with sharp contraction. In our view, the Bank of England will cut its main policy rate – which already stands at an all-time low of 1.00 percent – even further in the months ahead as the British economy remains mired in deep recession.
The European Central Bank probably has more cutting to do as well. However, it did not exercise that option at its policy meeting this week, choosing instead to keep its policy rate unchanged at 2.00 percent. The ECB said that it had anticipated the sharp drop in economic activity that has occurred since it last met in early January, and it had responded to that anticipation by cutting rates last month. By that logic, the ECB would be on hold unless the economy weakens more than anticipated.
As noted above, we believe the ECB will eventually cut rates further. Although the purchasing managers’ indices for the manufacturing and service sectors edged higher in January, they both remain in deep recession territory (see middle chart). Economic weakness likely will cause CPI inflation to decline further. Indeed, the overall rate of CPI inflation fell to 1.6 percent in December, and the preliminary estimate for January printed at only 1.1 percent, the lowest rate in nearly 10 years. In our view, severe economic weakness and rapidly declining inflation will give the ECB scope to ease policy further in the months ahead.
