U.S. Review
“Better News” but Still not Quite Good News
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July’s drop in nonfarm payrolls, smaller than consensus expectations, and slight decline in the unemployment rate raises the probability the recession has ended.
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The re-opening of motor vehicle assembly plants has temporarily boosted the employment data and many other economic reports. We may see a payback in coming months.
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Final demand appears to have improved slightly in July but incomes remain under pressure.
Better News but Less than Meets the Eye
This morning’s report that job losses slowed substantially during the month of July and unemployment rate dipped slightly to 9.4 percent is encouraging. Numerous employment surveys and anecdotal reports from businesses suggest the bulk of major layoffs are now behind us. The extent of the improvement and implications for the recovery may be exaggerated, however. What appears to have happened is that businesses slashed output much more dramatically than sales declined, producing a huge drop in business inventories. Nowhere was this more dramatic than in the motor vehicle sector, where the swing in output was amplified by bankruptcies at Chrysler and General Motors. Moreover, the early success of the cash for clunkers program will boost sales through Labor Day and allow vehicle production to bounce back a little further and for a longer period of time.
Nonfarm employment fell by 247,000 jobs in July, which is still a pretty hefty drop. Employment losses continue to be exceptionally broad based, with 76,000 jobs lost in construction and 119,000 jobs lost in service-providing industries. One notable area of weakness is retailing, which saw job losses essentially double in July to 44,000. Layoffs also picked up in wholesale trade and distribution. On the plus side, layoffs slowed a bit in the financial sector and temporary staffing companies shed just 10,000 jobs, which is far fewer than seen earlier in the year. Manufacturers shed only 52,000 jobs in July, which was the smallest drop since July of last year.
The improvement in the factory sector was mostly due to a rebound in employment in motor vehicles and parts, which added 28,200 jobs. That rebound likely boosted employment in several other sectors as well and was also likely largely responsible for the 0.4 percent rise in aggregate hours worked in the factory sector. Aggregate hours worked in the automotive sector soared at a 12.0 percent annual rate in July. With manufacturing hours up, aggregate hours worked were unchanged in July, which is the first time hours were unchanged since August of last year.
The smaller drop in nonfarm employment and leveling off in hours worked is consistent with the growing consensus that real GDP will grow solidly in the third quarter. We will release our forecast next week and our early read calls for a rise in real GDP at between a 2. 5 percent and a 3.5 percent annual rate
One factor that will play a big role in driving GDP growth in the current quarter is the improvement in motor vehicle sales. Sales rose to an 11.2 million unit pace in July, a full 1.0 million units above market expectations. The better showing was largely brought about by the cash for clunkers program. Sales will likely rise even further in August. The latest chain store sales also offer some encouragement. While the year-to-year numbers remain off by around five percent, sales rose solidly from June to July.
There were a few other signs that final demand is showing signs of improving. Pending home sales rose solidly in June, climbing 3.6 percent, and factory orders came in much better than expected, rising 0.4 percent in June.
Global Review
More Evidence that the U.K. Economy has Bottomed
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The current recession in Great Britain is roughly as severe as the deep downturn that occurred between 1979 and 1981. However, evidence continues to accumulate that the economy is bottoming.
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To help insure that the economy does not enter a renewed slide, the Bank of England decided this week to increase the size of its asset purchase program, an unconventional method to ease monetary policy. If, as we expect, the economy picks up some steam in the quarters ahead, the Bank will not need to ease policy further.
Has the Recession in the United Kingdom Ended?
Data released two weeks ago showed that British real GDP fell 0.8 percent (not annualized) in the second quarter relative to the previous quarter, which was much weaker than most investors had expected. From its peak in the first quarter of 2008, the U.K. economy has contracted nearly six percent, equivalent to the deep downturn that occurred between 1979 and 1981.
However, anecdotal evidence is starting to suggest that the economy is close to bottoming. As shown on the front page, the purchasing managers’ indices for both the manufacturing and service sectors have recently crossed the demarcation line that separates expansion from contraction, the first time both indices have been in positive territory since the spring of 2008. “Hard” data generally confirm the message from the survey evidence. Industrial production rose 0.5 percent in June relative to May, the largest monthly increase since October 2007. June’s rise notwithstanding, the level of industrial production remains depressed relative to a year ago (top chart).
The news on the housing front has also turned positive. A widely followed index of house prices rose 1.3 percent in July, the third month in the past four that house prices have increased. The index is down 15 percent from its peak, but the stabilization in recent months is encouraging (middle chart). Indeed, a respected trade association predicted that house prices will generally be higher at the end of 2009 than they were at the end of last year.
What accounts for the apparent stabilization in the U.K. economy? First, Great Britain is clearly not immune to developments in the rest of the world, and the collapse in U.K. exports that occurred late last year and earlier this year seems to be coming to an end. In addition, policy steps by British authorities also appear to be working. Car sales have jumped recently due in part to the British version of a “cash for clunkers” program, and the cut in the value-added tax may be helping to shore up growth in retail spending. Aggressive policy easing by the Bank of England has also helped to stabilize the economy.
Speaking of the Bank of England, the Monetary Policy Committee (MPC) decided this week to ease policy further despite signs that the economy is stabilizing. No, the MPC did not reduce its main policy rate from 0.50 percent, where it has been maintained since March (bottom chart). However, the MPC announced that it would increase its purchases of assets (i.e., government bonds and private sector fixed income securities) by £50 billion to a total amount of £175 billion. These unconventional policy steps have pumped the banking system full of liquidity, and have helped to prevent a marked increase in longer-term interest rates. In announcing its decision to increase the size of its asset purchase program the MPC noted that “the recession appears to have been deeper than previously thought.” By easing further, the MPC hopes to insure that a renewed slide in the economy does not develop. If, as we expect, the economy picks up some steam in the quarters ahead, the MPC will not need to take out additional insurance.
