Highlights
Unemployment Rate Rises to 8.3% in July Despite Stronger Nonfarm Payroll Growth
- The employment report for July was somewhat mixed, with stronger-than-expected nonfarm payroll growth but a shift in the unemployment rate back to 8.3%. Total nonfarm payrolls increased 163K in July, above consensus expectations for a 100K gain. June’s estimate was revised down from 80K to 64K, resulting in an average monthly increase of only 73K for 2Q12. Within the total, private payrolls increased 172K, the largest jump since February, with manufacturing up a surprising 25K. This data supports the ongoing argument that the warmer than usual winter shifted job growth to the first quarter that otherwise would have occurred in the second quarter.
- On the downside, nonfarm payroll growth did not rebound enough to push down the unemployment rate, or even keep it unchanged. At 8.3%, the increase in the unemployment rate reflected a drop in the participation rate to 63.7%. Flows out of the labor force increased 0.4% in July due to individuals leaving employment as well as some adjustments to population totals. According to the CPS labor force status flows, only 0.5% of unemployed individuals became employed in July.
- Ultimately, July’s better-than-expected employment report eases some worries over a stalling economy. However, given that job growth is lagged, we will likely see some slowing again later in the year that reflects the current weakness in demand conditions. Also, we expect that this could ease some pressure on the Fed to announce QE3 in the next meeting, but we will be better able to judge with the August employment report to be released beforehand.
June’s Personal Income Not Enough to Boost Consumer Spending
- Personal income increased 0.5% in June following a 0.3% gain in the previous month. The wages and salaries component gained some momentum but remained weaker than in the first quarter. On average, monthly income growth in 2Q12 was about half that in 1Q12.
- Unfortunately, consumers appear to be increasingly conservative when it comes to spending. Personal outlays remained unchanged in June after dropping 0.1% in May, ending the quarter on a weak note. In fact, average monthly spending growth in 2Q12 was the weakest since March 2009. However, the gradual improvement in labor market conditions seen in July’s report could boost consumer confidence throughout the third quarter. On the downside, the 0.1% decline in real PCE leaves little room for an upward revision to the advance GDP estimate for 2Q12.
Week Ahead
Consumer Credit (June, Tuesday 15:00 ET)
Forecast: $10.5B Consensus: $10.0B Previous: $17.1B
Total outstanding consumer credit continues to surpass expectations as a result of growing issuance of student loans rather than an increase in underlying consumer activity. Nonrevolving credit is driven in large part by increasing student loans, yet when excluding this government component, it has been mostly flat throughout the recovery period. Revolving credit has been a volatile component recently but jumped $8.0B in May, the strongest gain since November 2007. Weaker consumer spending data for June suggest that consumers were probably more hesitant to take on credit card debt compared to the previous month, a sentiment that is also reflected in the latest confidence reports. In general, we expect that total consumer credit will grow at a slightly slower pace compared to the previous month.
Productivity and Costs (2Q12, Wednesday 8:30 ET )
Forecast: 1.3%, 0.3% Consensus: 1.4%, 0.4% Previous: -0.9%, 1.3%
Nonfarm productivity and unit labor costs in 1Q12 were revised down on account of slower output growth and lower estimates for compensation. Looking at 2Q12 data, output has been slightly stronger as measured by the industrial production index, which increased 0.9% throughout the quarter. Despite the slower growth estimate reported in 2Q12, the minor decline in average hours worked suggests that productivity likely increased on a QoQ basis. In regards to unit labor costs, weaker labor market conditions and slower compensation growth in the second quarter point to downward pressure for employer expenses.
International Trade Balance (June, Thursday 8:30 ET)
Forecast: -$48.3B Consensus: -$47.5B Previous: -$48.7B
The international trade deficit is expected to narrow slightly in June after improving more than expected in May. Although slowdowns in Europe and China have raised concerns of deteriorating demand for US goods, lower oil prices should continue to help in the overall improvement of the trade balance. Export growth did rebound in May but will likely remain sensitive to external slowing, and we expect some monthly volatility through the second half of 2012. Various manufacturing surveys have hinted at slowing new export orders in recent months, pointing to reduced shipments ahead. The uncertain business outlook will continue to limit import orders, offsetting some potential weakness from export growth.
Wholesale Inventories (June, Thursday 10:00 ET)
Forecast: 0.2% Consensus: 0.3% Previous: 0.3%
Wholesale inventories have started to taper off a bit given the slowing consumer outlook and weak demand conditions. So far in 2Q12, wholesalers have increased inventory at about half the average pace as in 1Q12. In May, the stock to sales ratio increased for the first time in seven months, indicating that inventory growth should continue to slow on account of weaker sales. Finally, various manufacturing surveys have noted steady but lean inventory build, and we expect that wholesalers will continue to build stock at a modest pace.
Market Impact
This week’s calendar should incite less market anxiety compared to the previous week, though market sensitivity will linger as the implications from the latest employment report and other weak data settle in. A significant improvement in the international trade balance could hint at an upward revision to the GDP estimate for 2Q12, while a look at productivity and costs could confirm the seriousness of the slowdown for the business sector.
Quote of the Week
Jeffrey Lacker, Richmond Federal Reserve President
Lacker says Fed rate hike could come before late 2014
3 August 2012
“I believe that exceptionally low federal funds rates are not likely to be warranted for this length of time. My assessment is that significant uncertainty regarding the evolution of economic conditions over the next few years makes the future path of interest rates difficult to forecast. The Committee's statement implies more confidence about the persistence of low interest rates than I believe is justified by the current outlook.”
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