U.S. Review
How Much Trouble Remains?
The economic news continues to move in the right direction, although most reports remain merely be ‘less bad’ rather than good. The morning’s nonfarm employment figures are a prime example. Nonfarm payrolls fell 539,000 in April, which was less than the 600,000 consensus estimate. Despite the smaller than expected decline, there are still plenty of reasons to be concerned. Previous employment losses were slightly worse than first reported. In addition, April’s payroll figures were bolstered by a rise of 72,000 in government employment, most of which reflects hiring for the 2010 Census. Moreover, April’s smaller loss still translates into an annual loss of nearly 6.5 million jobs.
There were a few glimmers of hope. The employment diffusion index rose nearly eight points to 28.2 percent. The average workweek was also unchanged and the factory workweek inched up a tenth of an hour to 39.6 hours. Total hours worked declined 0.6 percent in April and are down at a 8.4 percent annual rate over the past three months, which is not quite as severe as in the first quarter.
Fewer Layoffs Appear to be in the Pipeline
There were plenty of encouraging signs this week, although few could be characterized as unambiguously good news. The best news is that layoffs appear to be subsiding. Weekly first-time claims for unemployment insurance declined by 34,000 in late April, marking the second consecutive weekly drop. The four-week moving average declined by 14,750 to 623,500, which marks the fourth consecutive drop. The improvement in jobless claims is now a little bit too definitive to dismiss, particularly since it is backed up by a let up in reported job cuts as reported by Challenger, Gray & Christmas, as well as the BLS monthly series.
In the past, four consecutive declines in the four-week moving average of first-time jobless claims has typically been a sign that the recession is ending. That is what happened at the tail end of the last recession. That drop, however, was about twice as large in percentage terms as what we are seeing today. Moreover, jobless claims were significantly lower than they are today. A strong recovery did not take hold until the four week moving average moved definitively below the 52-week moving average, which did not occur until nearly two years after the 2001 recession ended.
Fewer layoffs are a key precursor to an economic recovery but another important key ingredient is stronger job growth, and there are far fewer encouraging signs on that front. Nonfarm productivity growth did improve during the first quarter, climbing at a 0.8 percent annual rate. The increase follows a 0.6 percent decline in the fourth quarter. The rise in nonfarm productivity means that businesses are getting a better handle on how to align employment and hours worked with current and projected sales and output. Rising productivity growth means that future job cuts will not have to be as severe as they have been over the past five months. An actual pick up in hiring, however, will likely take much longer to materialize, as businesses will first need to get more output out of their existing workforce. Productivity usually soars in the early stages of a recovery, which bolsters profits and sets the stage for new hiring.
Productivity in the factory sector continued to weaken, particularly for producers of durable goods. Output in the durable goods sector tumbled at a 31 percent annual rate, which was faster than manufacturers could reduce employment and hours worked. The auto sector undoubtedly accounted for most of this drop and Chrysler and GM are planning extended shutdowns over the next few weeks. How the economy handles these shutdowns will go a long way toward determining when the recession actually ends.
Global Review
Canadian Turnaround So Soon?
Market watchers were stunned by news this week that the Canadian economy added 35.9K jobs in April. This would be equivalent to a gain of over 350K jobs in the U.S. Does this better-than-expected jobs report mean that the Canadian economy will be among the first economies to stage a lasting recovery?
While Canada may indeed be one of the first developed nations to find its footing, this jump in payrolls is not likely a sign of a lasting turnaround. As Han Solo said to Luke Skywalker, “Come on buddy, we’re not out of this yet.” From month to month, there can be some statistical “noise” in employment numbers. As the chart to the left shows, it is not uncommon to experience a month of job losses in a period of expansion. So the opposite shouldn’t be surprising. In order to filter out the noise, it is useful to look at a six month moving average to get a better sense of the underlying trend in the job market. By this measure, the labor situation in Canada is still in as challenging a condition as we have seen in years. The job market would need to show lasting growth before it could be supportive of the income growth that would spur a robust recovery in consumer spending.
A Turnaround, While not Imminent, Appears to be in the Offing
That said, this strong showing for jobs was not merely a flash in the pan. You did not have to look far this week to find other signs of a change in the winds in the Canadian economy, even in troubled areas like housing. Building permits soared 23.5 percent in March. The gain was substantially higher than consensus estimates and the largest monthly increase in two years. Though, as with the jump in employment, one month does not make a trend. Even counting the jump in March the three month moving average still trended slightly lower, reflective of the nasty numbers we saw in the preceding months. In a separate release we learned that housing starts declined again in April. Still, the jump in permits is a welcome sign of a potential bottom for housing this summer.
Another unexpected sign of strength came this week when the Ivey Purchasing Managers’ Index posted a much better-than-expected reading of 53.7 in April. A number above 50 is associated with economic growth; the consensus was only expecting a reading in the low 40s. The participants in this survey are deliberately selected from various economic sectors and geographic regions to be broadly representative of the Canadian economy as a whole. It also includes the government sector, so the recent jump may in part reflect the government spending plan to stimulate growth.
The Bank of Canada (BoC) has also done its part to stimulate growth by cutting its key lending rate by a cumulative 425 basis points since December 2007. This week’s early signs of recovery suggest the bank’s efforts are paying off. The Canadian dollar continued to strengthen and is now at its highest level versus the U.S. dollar since November of last year as oil and other commodities have strengthened over the same period. If the Canadian economy comes roaring back faster than expected and commodity prices continue to rise, these gains could hold. But if the recovery is more gradual and commodities hold their current levels, the Canadian dollar would likely give back recent gains.
