Glimmers of hope

WHEN Barack Obama visited Elkhart, Indiana, in early February, a few weeks after his inauguration, it was a sombre affair. In the previous 12 months the area’s unemployment rate had more than tripled to 18.3%. The president pleaded for the passage of a massive fiscal stimulus, insisting that “doing nothing is not an option.” By the time he returned to Elkhart on August 5th he was quite a bit sunnier. Local factories are “coming back to life”, he proclaimed. Two days later he declared: “We're starting to see a kind of resurgence of optimism.”

Mr Obama’s good spirits are well grounded: America’s recession appears to be coming to an end. On August 7th the government reported that the unemployment rate fell to 9.4% in July from 9.5% in June, the first drop since April 2008. Non-farm employment fell by 247,000, or 0.2%, weak in absolute terms but the least in 11 months, giving clear evidence of dissipating downward momentum.

On July 31st the government reported that real gross domestic product (GDP) contracted in the second quarter, but at only a 1% annual rate. Much of that decline reflected business’s determination to keep factories and workers idle and fill new orders out of existing inventory. Now, stocks are so depleted that production will soon have to restart. GDP will probably rise in the current quarter by as much as 3%. In July, manufacturers reported that new orders were growing briskly, the best in over two years, and car sales jumped by 15% to an annualised 11.2m.

Mr Obama and his aides have wasted no time in crediting the $787 billion fiscal stimulus for spurring this recovery. On August 6th Christina Romer, his chief economist, unveiled estimates that the plan had boosted second quarter payrolls by 485,000 and growth by 2.3 percentage points (against what they otherwise would have been). While nothing to sneeze at, that contribution is probably far less important than the massive injection of private and public capital, loans and loan guarantees into the financial system and bank stress tests which probably stopped the recession from becoming a depression.

Despite the good news, Mr Obama’s approval ratings, though high, are slipping. This, in part, is because even with July’s drop, unemployment remains surprisingly high. It usually responds to economic growth in a relationship that was captured by an economist, Arthur Okun, in the 1960s. But it has risen more during this recession than most formulations of Okun’s Law would suggest.

The publication of revisions to earlier GDP data explains some of the discrepancy. The revisions show that GDP has declined a cumulative 3.7% since the end of 2007, thus tying with 1957-58 as the deepest recession since the Depression (before these revisions, the decline was shown to be 2.5%). Even so, Michael Feroli, an economist at JPMorgan Chase, says that Okun’s Law would have predicted an unemployment rate of just 8.6% during the second quarter, whereas it actually averaged 9.3%.

Several factors are at work. Expanded unemployment-insurance benefits encourage some workers to keep looking for a job rather than drop out of the workforce altogether, adding perhaps half a percentage point to the unemployment rate, according to the Fed. The evisceration of their wealth may have led people to look for work rather than retire or stay at home with the children. The drop in July’s unemployment rate hints at a reversal, though possibly temporary, of such trends since it was driven not by higher employment but by fewer people looking for work. Otherwise, the rate would have risen to 9.7%, HSBC estimates.

And firms have been unusually quick to slash payrolls. Some may be husbanding cash more carefully because of the credit crunch. Others may simply be more pessimistic about an eventual recovery. Whatever the reason, one result is that productivity is rising, cushioning profit margins. Robert Hall of Stanford University, who heads the academic committee that dates recessions, says Okun devised his law in an era when productivity usually fell during recessions: “When productivity rises, the law fails. Though I was a great fan of Okun’s, I’m afraid his law is obsolete.”

The difference with Europe is especially striking. In the euro zone GDP has fallen further than in America but unemployment has risen less. Employers are slower to sack workers than in America, partly thanks to government subsidies that encourage them to shorten working hours instead. This means that European unemployment will probably be slow to fall once GDP recovers.

But it looks as if it will be slow to come down in America as well. Firms are unlikely to do much hiring until growth seems durable, and so far it does not. Replenishing inventory will be a temporary fillip without an increase in consumer demand, for which there remains scant evidence.

Car sales have been strong in great part because of the federal cash-for-clunkers programme, which allows Americans to get up to $4,500 for their old car when they exchange it for a new one. The programme was supposed to run until November 1st but its $1 billion was snapped up within days of its start on July 24th. Both houses of Congress have authorized for an extra $2 billion. But cars bought now may mean fewer cars bought later.

If growth peters out again later this year, it will dash the expectations Mr Obama has done so much to raise by touting his stimulus.

http://www.economist.com

Treasury Economist Sees Signs Economy Is Stabilizing, Job Growth Likely To Lag

Recent gross domestic product and unemployment figures point to a stabilizing U.S. economy, according to a senior Treasury Department official.

Alan Krueger, Treasury Chief Economist and Assistant Secretary for Economic Policy, told reporters Friday that the economic data points to positive signs.

"Six months ago … the economy felt like it was in a free fall," Krueger said. "This administration implemented a aggressive and comprehensive set of measures that put the brakes on the downturn. We are now seeing increasing signs that the economy is stabilizing."

However, he added, "We are reminded by today's job numbers that a lot of work remains to be done."

New statistics showed Friday that only 247,000 jobs had been lost in July and that the unemployment rate ticked down slightly from 9.5 percent to 9.4 percent.

Krueger said the news, while better than in previous months, was still troubling.

They are "an indicator of how long and brutal this recession has been," he said. "We didn't get into these problems overnight and it's going to take a while to get out of them."
He added, "There's no doubt, from looking at the statistics, that the recovery act and other policy actions helped to put the brakes on the downward spiral the economy was growing through."

There are also positive signs in the figures on companies using temporary workers, which Krueger said is often a leading indicator of the broader job market.

"Companies often turn to temporary health employers when they are not sure whether things are improving [and] don't necessarily want to lock in to permanent expansion just yet," he said. "This month, temporary help employment was minus 10,000, which is negative so that's not a good sign."

He added, "On the other hand the temporary help industry was kind of going through a free fall and that looks like it's substantially moderating as well."

Krueger also noted as a point of concern the long-term unemployment figures, which show a record number of people having been out of work for more than 27 weeks.

The administration has taken a number of steps, Krueger said, to ease the burden for the unemployed, from extending benefits, excluding a portion of benefits from income tax liability and providing a tax credit to help the unemployed hold on to their health insurance.

However, with many long-term unemployed workers facing the prospect of their benefits coming to an end, Krueger would not commit to a further extension.
He did note, however, that some of the job-creating projects supported in the $787 billion economic stimulus and recovery act would likely begin coming on line in later parts of the year.

"In terms of quarter by quarter I would say that we're going to see more support from the recovery act coming through the economy in the third quarter than the second quarter," he said. "If you look at the predicted jobs impact of the recovery act, that is expected occur with a lag and that the largest jobs impact will happen in 2010."

By RTT Staff Writer(RTTNews)

Jobless rate down for first time in a year

The long-battered U.S. job market showed some signs of improvement in July as employers cut far fewer jobs from payrolls and the unemployment rate fell for the first time in more than a year, according to a government report Friday.

The Labor Department reported a net loss of 247,000 jobs in July, the fewest job losses since August 2008. Economists surveyed by Briefing.com had forecast a loss of 325,000.

The job loss in June was also revised lower -- to 443,000 job losses from 467,000.

The unemployment rate fell to 9.4% from 9.5% in June, the first decline in that closely watched reading since April of 2008. Economists had expected unemployment to rise to 9.6%.

The unemployment rate fell even as employers continued to cut jobs because the Labor Department estimated there were 237,000 fewer people it counted as unemployed.

That decline in the labor force can be due to discouraged job seekers who have stopped looking for work, people who now consider themselves retired or those have gone back to school rather than applying for jobs.

"You can't lose jobs and have the unemployment rate decline unless folks are opting out," said Tig Gilliam, CEO of Adecco Group North America, a unit of the world's largest employment staffing firm. "That means unemployment is going to go back up again."

There were other signs of improvement in the report, however.

The average hourly work week edged up to 33.1 hours, from a record low of 33.0 hours in June. The number of workers who wanted full-time work but could only find part-time jobs fell by 191,000, or 2%. That suggests that many workers who had their hours cut or were given unpaid days off in the current downturn are going back to full-time status.

But there was also plenty of bad news to be found in the report.

The number of people unemployed for more than six months continued to rise, reaching nearly 5 million people, a record high. The average time that an unemployed person has been out of work reached 25.1 weeks, the highest reading in the 61 years that this has been tracked by the Labor Department.

The Labor Department also said that one reason for the declining number of job losses was because cuts had been so deep leading up to July that there were fewer workers to lay off during the seasonal shutdown that happens in some factories, such as those in the auto industry.

Since the start of 2008, 6.7 million jobs have been lost in the U.S. Several economists said that while the report confirms other economic readings suggesting that the recession may be ending, it's too soon to predict a sharp gain in jobs in the near term.

"The dawn of an economic recovery is here," said Sung Won Sohn, a professor of economics at Cal State University Channel Islands. "The economy is in the process of bottoming, but the job market will lag behind. Businesses, which engaged in preemptive layoffs earlier, are not about to start hiring people."

Mark Vitner, senior economist at Wells Fargo, agreed that job losses are likely to continue into early next year, with unemployment eventually rising to about 10% to 10.5%. He said the fact that unusual extended shutdowns in auto plants distorted these seasonally-adjusted numbers.

"We're not ready to break out the champagne," he said. "There's less improvement than meets the eye."

Gilliam also doesn't expect to see overall job gains until late this year at the earliest.

"The glass is both half empty and half full in this report," said Gilliam.

But Robert Brusca of FAO Economics said he believes there is more strength in the job market than many people are willing to acknowledge. He said that the government may even report an overall payroll gain for August next month.

"There is nothing about these numbers that suggest it's a fluke," he said.

More jobs were lost in July in the manufacturing and construction sectors as well as in the retail and business and professional services industries . But there were net gains in the education, health care and leisure hospitality sectors. Government employers also added jobs.

Average hourly wages edged up 3 cents an hour, to $18.56. That increase, combined with a slightly longer work week, lifted average weekly wages by 0.5%.

But that still left weekly wages only 1% higher than they were a year ago, little better than the 0.9% rise posted for June. That increase was which the smallest increase in paychecks in 23 years.

By Chris Isidore, CNNMoney.com senior writer