U.S. Review
The Bottom May Finally be Near
Nonfarm employment declined significantly less than expected for the second month in a row. The decelerating trend of job losses now looks encouraging and the modest improvement is consistent with the most recent weekly unemployment claims data. That said, we are truly in some sort of alternative universe when a monthly loss of 345,000 jobs is widely considered to be good economic news.
May’s employment report is still extremely weak. Not only did payrolls fall by 345,000 jobs but the unemployment rate also increased dramatically and hours worked plummeted. On average, the economy shed 500,000 jobs during each of the past three months and aggregate hours worked fell at an 8.6 percent annual rate.
Employment losses also remain extremely broad-based. The only solid positives are education and healthcare, and those gains look suspect. Hospitals, private schools, and colleges have announced unprecedented layoffs. We doubt the official numbers capture these losses. The average workweek also fell sharply in May, a sign that more cutbacks are in the pipeline.
Unemployment Surges to its Highest Level Since 1983
The civilian unemployment rate surged half a percentage point to 9.4 percent in May, which was exactly in line with our expectations. The surge brings the unemployment rate to its highest level since July 1983 and reflects both the heavy layoffs over the past year and continued unwillingness of businesses to boost hiring.
The jobless rate is bound to rise further in coming months but the increases should be less dramatic. The most recent weekly unemployment claims data show both first time unemployment claims and continuing unemployment claims declining in recent weeks. In addition, after rising for 11 consecutive weeks, the insured unemployment rate has remained unchanged at 5.0 percent for the past two weeks. The most recent data, however, cover the period surrounding the Memorial Day holiday and declines around that holiday are not unusual. Since the timing of Memorial Day shifts, however, it can wreak havoc with the seasonal adjustment process. We would expect to see some bounce back next week, when the early June data are reported.
The modest decline in weekly unemployment claims and smaller losses in nonfarm payrolls have raised hopes that the end of the recession may be near. The second quarter should mark the last negative period for real GDP and the recession should end at some point in the third quarter. The end of the recession will not mark the end of the economy’s troubles, however. Consumers are still de-leveraging and will continue to do so until they rebuild savings and feel more comfortable about their employment and income prospects. That could be several months down the road, as we expect the unemployment rate to peak around a year from now at somewhere between 10.5 and 11 percent.
Consumers clearly were not in the mood to spend freely in May. Monthly chain store sales figures showed broad-based declines for the month. Comparable store sales, which now exclude Wal-Mart, were down 4.6 percent from one year ago and total store sales were down 2.4 percent. Drug stores were the only category posting an increase in sales.
Motor vehicle sales were better than expected in May. Manufacturer sales rose to a 9.9 million unit annual rate during the month, which matches March as the strongest pace of the year. The increase likely reflects some improvement in dealer financing. Dealers have held extremely lean new car inventories in recent months. Retail motor vehicle sales will not likely improve to the same extent as manufacturer sales, reflecting the continued reluctance of consumers to commit to major purchases.
Global Review
Foreign Economies: Terrible Q1, But Q2 Looking Better
A number of major countries reported first quarter GDP data this week, and the numbers were generally horrible. For example, both the Swedish and Swiss economies contracted at more than a 3 percent annualized rate in the first quarter, and real GDP in Canada declined 5.4 percent. The carnage in the global economy in the first quarter can be summed up with the graph at the left. Through February, industrial production in the OECD countries, the 30 most advanced economies in the world, was down 17 percent on a year-over-year basis. Declines registered over the past four decades pale in comparison to the severity of the current downturn.
That said, there have been some glimmers of light in recent economic data. For example, Australia defied the fate of most other major economies by eking out a positive growth rate of 1.5 percent in the first quarter. Moreover, recent monthly indicators suggest that the sheer freefall in economic activity is coming to an end. As shown in the top chart, the British service sector PMI in May rose above the demarcation line that separates expansion from contraction. The indices for the construction and manufacturing sectors remained below 50 in May, but both PMIs registered noticeable increases relative to April. Comparable PMIs in the Euro-zone also rose in May, although they have yet to breach 50 yet, and the Chinese manufacturing PMI remained in positive territory for the third consecutive month in May.
Another bright spot in terms of the global economy has been the marked rise in the Baltic Dry index, which measures international shipping prices of dry bulk cargoes (middle chart). The rise in the index suggests that global trade, which collapsed late last year in the wake of the credit crunch, is starting to pick up again. The recent increase in most commodity prices and the rallies in most stock and corporate bond markets are also consistent with improving economic conditions.
The better run of economic data lately kept most major central banks on hold this week. Central banks in Australia, Canada, the Euro-zone and the United Kingdom all held policy meetings this week, and each bank left its major policy rate unchanged (bottom chart). In addition, neither of the major central banks announced further unconventional policy steps this week. Most major central banks appear to be in a wait-and-see mode at present.
However, the recent run of better-than-expected data needs to be put into perspective. The freefall in global economic activity may be coming to an end, but a recovery, much less a self-sustaining expansion, is not under way yet. As noted above, British PMIs for the manufacturing and construction sectors remain below 50 at present. Thus, activity in these sectors likely continued to contract in May, albeit not nearly as rapidly as early this year. The sub-50 readings among the Euro-zone PMIs suggest that the recession in continental Europe has probably continued into the second quarter as well. Until growth turns positive and confidence improves significantly, the global economy will remain vulnerable to negative shocks that could derail the hoped-for recovery.
