U.S. Review
Making Progress on the Road to Recovery
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December’s employment report was generally disappointing, with a larger than expected 85,000-job decline in nonfarm payrolls and huge declines in household employment and the civilian labor force.
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Most major chain stores reported better-than-expected results for December.
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Manufacturing activity improved toward the end of 2009, with factory orders rising solidly and the ISM manufacturing survey ending the year at 55.9.
Employment Gains Are Not There Yet
December’s employment report was somewhat of a disappointment. Many were expecting a small increase in employment to be reported for December, even though the consensus was calling for a small decline. Our own forecast called for a larger than consensus drop and we had repeatedly noted that the optimism so many were showing was premature. The actual data proved to be weaker than our forecast, with nonfarm payrolls declining by 85,000 in December and the household survey showing substantial drops in both employment and the labor force.
Revisions to the previously published data produced a slight increase in employment during November. The 4,000 job increase was the first since the recession began back in December 2007. Any celebration about November’s increase was tempered by downward revisions to the October data. On net, the employment data were revised down for the two previous months by 1,000 jobs. Moreover, benchmark revisions will be made to the employment data next month dating back March 2008. The BLS has reported the revision would be around 0.6 percent, which would result in an additional 830,000 job losses over the past two years.
The unemployment rate was unchanged at 10.0 percent, but beneath the surface there was a great deal of weakness. Both household employment and the civilian labor force tumbled in December, with the labor force plunging 661,000 and employment declining by 589,000. In addition, both the average and median duration of unemployment increased during the month, reflecting the continued difficulty the unemployed are having finding another job.
While the December employment report was disappointing there were some positive rays of hope in the report. Hiring at temporary staffing companies posted its fifth consecutive increase, with employment rising by 47,000 in December. Aggregate hours worked also held on to their strong 0.6 percent November gain and the percentage of industries adding jobs held above 40 percent for the second month in a row. All these are things that typically improve six to nine months before employment begins to rise. We continue to believe the economy is moving closer to the point where we will see consistent and meaningful gains in nonfarm payrolls, but we are not there yet.
Early reports from the holiday shopping season continue to come in ahead of expectations. Chain store sales for December rose a solid 2.8 percent over their year ago level. The increase is at least partly due to less discounting on the part of retailers, so likely reflects less of an increase in volume. The government figures due out next week will also likely show less strength as they are adjusted for holidays and Thanksgiving came early this year.
Data from the manufacturing sector is another bright spot. Business inventories have been drawn down to the point that orders and output are now rebounding, even with only minor gains in final demand.
Global Review
Euro-zone: Where Is the Recovery?
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The purchasing managers’ indices in the Euro-zone suggest that real GDP growth likely remained positive in the fourth quarter. However, “hard” data have been less encouraging. Although we expect that economic growth in the euro area will remain positive, we believe that the pace of expansion will remain frustratingly slow over the next few quarters.
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The core rate of inflation continues to trend lower. With benign inflation and a weak recovery, we expect that the European Central Bank will refrain from raising rates well into the second half of the year.
How Strong is the Expansion in the Euro-zone?
The purchasing managers’ indices in the Euro-zone rose further into expansion territory in December, suggesting that real GDP growth in the euro area remained positive in the fourth quarter. Indeed, the service sector PMI rose to its highest level since autumn of 2007 (See graph on front page). Although we concur with the view that the expansion in the euro area remains intact, we believe that the pace of recovery will remain quite modest, at least in the near term. Real GDP rose at an annualized rate of only 1.7 percent in the third quarter relative to the previous quarter, and we project that the economy eked out a similar rate of expansion in the fourth quarter.
Despite solid readings in the PMIs, “hard” data from the Euro-zone have been generally disappointing lately. For example, industrial orders declined 2.2 percent in October, more than reversing the 1.7 percent increase registered during the previous month (top chart). Moreover, orders in the overall euro area have been flat on balance since July. German orders rose 0.2 percent in November relative to the previous month, which holds out hope that orders in the Euro-zone also edged up in November, but the outturn can hardly be characterized as robust.
Flatness in orders over the past few months has translated into softness in industrial production (IP). Indeed, the fourth quarter got off to a weak start as Euro-zone IP dropped 0.6 percent in October relative to the previous month. In Germany, IP in November retraced some of its large decline in October, which suggests that IP in the overall euro area may also have bounced back somewhat during the month. (Official data will be released next week – see page 5). Weakness in the production of consumer goods has helped to weigh on Euro-zone IP recently.
In that regard, retail spending in the Euro-zone remains weak. Indeed, the volume of retail spending (excluding autos) in the overall euro area was nearly 4 percent below its year-ago level in November (middle chart). It is not often that we apply the term “strong” when we refer to consumption expenditures in Germany and Italy, but consumer spending in these two countries is holding up better (in relative terms) than in most other economies in the Euro-zone. Real retail spending in Italy is essentially flat while German consumer spending is down “only” 3 percent. In Spain and Ireland, which are both reeling from the fallout of their burst housing bubbles, real retail sales are down about 6 percent. Greek consumer spending is down an incredible 15 percent on a year-ago basis.
CPI inflation in the Euro-zone recently returned to positive territory due to the rise in energy prices from their lows last year (bottom chart) However, the “core” rate of CPI inflation has declined to its lowest rate in nearly nine years due to economic weakness in the Euro-zone (bottom chart). As we discuss on page 5, the European Central Bank holds a regularly scheduled policy meeting next week, and the probability that the Governing Council hikes rates next week is miniscule. Indeed, we believe that the ECB will be on hold well into the second half of the year.
