Mar 05th

Weekly Economic Insight: 1 March – 5 March 2010

Author: Kenn Lamson

Comments: 0

The week ending 5 March 2010 saw the manufacturing sector post somewhat slower growth than expected but services moving further into expansionary territory.  The American consumer may have recently loosened the purse-strings, with both spending and credit rising more than expected.

RELEASE
(leading, coincident, or lagging indicator)

PERIOD

ACTUAL

EXPECTED

LAST

HIA COMMENT

Consumer Spending (leading)

 January (MoM)

 +0.5%

 +0.4% +0.2% On an inflation-adjusted basis, MoM spending rose 0.3%.
ISM Manufacturing Index (leading)

 February 56.5 57.5 58.4 In February the manufacturing sector expanded for the seventh consecutive month, albeit at a slower pace than January.
Construction Spending (leading)

 January (MoM) -0.6% -0.8% -1.2% Construction spending continued its downward trend. A drop in non-residential spending was the primary culprit.
ISM Services Index (leading)

 February 53.0 51.0 50.5 The ISM’s non-manufacturing index rose again and moved further into expansionary territory in February. The important new orders component grew for the sixth consecutive month.
Factory Orders (leading) January (MoM) +1.7% +2.0% 1.0% Orders for durable goods, already released, rose +2.6%; nondurable goods were up +0.9%.
Productivity 4Q09 (QoQ) +6.9% +6.3% +6.2% Output jumped +7.6% while hours worked only rose +0.6%.
Unit Labor Costs 4Q09 (QoQ) -5.9% -4.5% -4.4% Since productivity rose faster than compensation, ULC dropped.
Unemployment Rate (lagging)

 February 9.7% 9.8% 9.7% Unemployment rate remained unchanged. According to the Household Survey the number of unemployed Americans rose by 34K to 14.9 million in February; this number has risen by 8.4 million since the official beginning of the recession in December 2007.
Nonfarm Payrolls (lagging)

 February -36K -50K -20K The Establishment Survey showed a seasonally-adjusted drop of -60K jobs in goods-producing businesses, versus a gain of +42K in service-providing businesses.
Consumer Credit (lagging) January +$5 billion -$4.0 billion -$1.8 billion Consumer credit rose for the first time in a year.

CONSUMER SPENDING

On balance, consumer spending continued on its gradual uptrend, and for a change was at a faster rate than expected.  January’s increase was lead by spending on nondurable goods (boosted by gasoline expenditures), which gained 1.8% month-over-month.  Spending on durable goods was up only 0.1% and services up 0.2%. The monthly personal savings rate fell from a revised 4.2% in December to 3.3% in January. We believe it’s exceptionally unlikely that the American consumer will resume spending at pre-recessionary levels anytime soon (perhaps for many years), given the elevated unemployment level and other sources of economic distress; however, stabilization and moderate growth in spending driven by increases in wages and employment while simultaneously reducing outstanding credit and raising the savings rate is our fervent hope.

GRAPH: Bloomberg

ISM MANUFACTURING INDEX

While it represents a relatively small percentage of the economy, this report points to a continued expansion of the manufacturing sector.  While the survey fell back from January’s surprisingly good reading, the Index level indicates solid growth.  Growth appeared in 11 of 16 industries surveyed.  Importantly, new orders accelerated for the eighth month and the order backlog grew for the second month. The employment component of the Index rose by nearly three points further into positive territory, suggesting that manufacturers have reached their maximum productive capacity given existing resources and have begun to hire. Inventories remain extremely lean.

GRAPH: ISM

CONSTRUCTION SPENDING

A -1.4% month-over-month decline in non-residential spending was the primary driver of the January decline. Residential construction spending rose +1.1% in January while government spending fell -0.7%.  Year-over-year, total construction spending declined -9.3%.

Weakness in construction spending is a double-edged sword: Positively, a slower rate of construction makes it easier for the large volume of vacant, foreclosed or otherwise distressed homes and other buildings to be absorbed; negatively, however, continued contraction of this sector of the economy removes a potential driver of employment and incomes.  Clearly it’s unlikely that construction will be a broad-based engine of economic growth in the near future.

GRAPH: Bloomberg

White = actual; Red = revised

ISM SERVICES INDEX

Beating the consensus of analysts’ expectations, the Index rose further above the 50.0 mark, indicating continued expansion of the critical service sector. Growth was seen in the “information”, “arts, entertainment & recreation” and “transportation” industries. Growth of the new orders component for the sixth consecutive month is also encouraging. However, the Index’s employment component showed a slower rate of contraction but remains at a dismal level. Also concerning is that only 9 of 18 industries expanded, with 8 continuing to contract.

GRAPH: ISM

FACTORY ORDERS

Growth in new orders was solid for both nondurable goods and durable ones in January. Orders were strongest in nondefense aircraft & parts and defense communication equipment (last month’s weakest groups).  New order growth was weakest in power transmission equipment and photographic equipment. Basically an updated version of last week’s Durable Goods Orders release, the durable goods side of this series tends to be fairly volatile since it includes high value transportation items such as aircraft and ships.

GRAPH: Bloomberg

PRODUCTIVITY AND COSTS

Unsurprisingly, since unemployment has risen while manufacturing has apparently begun to rebound, labor productivity – the amount of goods and services produced per worker – rose sharply in the fourth quarter of 2009. As companies sliced payrolls and benefits, Unit Labor Costs – the ratio of hourly compensation to productivity – of course declined.

While this data is by now old news, it reinforces that, since labor-related costs are the vast majority of expenses for most companies, consumer-level inflation is unlikely to become a problem in the near-term.

GRAPH: Bloomberg

Quarter-over-Quarter change in Labor Productivity (white) and Unit Labor Costs (red)

EMPLOYMENT SITUATION

The most closely-watched economic release of the week (and the month) was Friday’s Employment Situation. It’s somewhat confusing because it contains data from two surveys, the Household and the Establishment, that are conducted differently and therefore provide different estimates. Also, each Survey shows both Seasonally Adjusted and Not Seasonally Adjusted data, so getting a read on what’s actually happening is challenging. The “headline” numbers are the Unemployment Rate from the Household Survey and the Nonfarm Payrolls figure from the Establishment Survey, both of which are seasonally adjusted. For a broader discussion of the Employment Situation data, see our Economic Insight research entitled “Fun With Numbers” released 5 September 09.

Household Survey

Adjusted for seasonal variations, the Household Survey data showed that the number of unemployed persons rose by +34K during February, interrupting the decline from prior months.  Full-time workers have declined by -4.0 million over the past year while part-time workers have increased by about +1 million. About 8.8 million Americans are employed part-time because of slack business conditions or because they could only find part-time work, up from 8.3 million in January.  Multiple job-holders remained relatively stable at 5.1% of the total employed. The average duration of unemployment shortened slightly in February to 29.7 weeks from 30.2 weeks – about 7 months – but an alarming 40.9% (6.1 million) of unemployed Americans remaining unemployed 27 weeks or longer. Because of the increase in the number of temporary and part-time workers, the broadest measure of labor underutilization, which also includes “marginally attached” and “discouraged” workers, rose to 16.8% in February from 16.5% in January.

According to the Household Survey the unemployment rate for manufacturing jobs was 12.1%; for construction, 27.1%; agriculture, 18.8%; healthcare and education, 5.6%; and government, 4.0%.

GRAPH: Bloomberg

UNEMPLOYMENT RATE

Establishment Survey

The seasonally adjusted Establishment Survey data showed a drop of -60K jobs in goods-producing businesses versus a gain of +42K jobs in service-providing businesses; notably, this report appears at odds with the ISM manufacturing and nonmanufacturing survey data cited above.

While the overall number showed a small (-18K) decline, the Survey showed gains in many major private industry groups. As suggested by the Household Survey, temporary help services once again added a relatively large number of workers (+48K) and healthcare & social assistance companies added +20K.  Meanwhile, the construction sector continued to bleed jobs, losing another -64K and transportation & warehousing lost another -12K.  Government employment totals fell by -18K, with local government shedding -31K while the Federal government added +16K.

Average hourly earnings were $22.46 in January, up $0.01 from January and $0.41 from a year ago. Month-over-month Increases have been modest but consistent, reinforcing the idea that wage pressures are nonexistent.

The average private work-week shortened by -0.1 hours to 33.8 hours. The longest work-weeks were recorded in Mining & Logging (42.6 hours), Utilities (40.6 hours) and Durable Goods manufacturing (39.8 hours). The shortest hours were, unsurprisingly, in Leisure & Hospitality (25.7 hours), Retail (31.2 hours) and Education & Healthcare (32.6 hours).

GRAPH: Bloomberg

MONTH-OVER-MONTH CHANGE IN NONFARM PAYROLLS

Analysis

The Establishment Survey has a “large company” bias; the “birth/death model” is used to estimate the number of jobs created by small companies.  Given the importance of small businesses in our economy, we believe (and the historical record would suggest) that these firms are the “canary in the coalmine” of domestic economic activity, since they have less cash on the balance sheet, less access to credit, and less exposure to overseas markets than large companies. Consequently, we prefer to emphasize the Household Survey in our analyses.

According to the BLS the massive snowstorms that hit the US (especially the east coast) probably didn’t skew the February unemployment stats.   However, according to the BLS, “In order for severe weather conditions to reduce the estimate for payroll unemployment, employees have to be off work for an entire pay period and not be paid for the time missed. While some persons may have been off payrolls during eh survey reference period, some industries, such as those dealing with cleanup and repair activities, may have added workers.”

We see Friday’s release as offering mixed signals:

  • The “headline” numbers were basically neutral: The unemployment rate remained unchanged and nonfarm payrolls were -36K.
  • The Household Survey’s reported seasonally-adjusted month-over-month increase of +308K in the number of unemployed Americans and an increase by +34K in the number employed.
  • The broadest measure of under- and unemployment rose again, predominantly due to a sharp increase in the number of Americans working part-time for economic reasons.
  • The percentage of “long-term unemployed” workers fell slightly but remains painfully high.
  • The labor force participation rate moved up one-tenth to 64.8%, a plus.
  • Average hourly earnings rose, but the work-week shortened.

A rather sobering realization is the fact that if this recovery were “normal”, the economy should be generating substantially more jobs than were are currently seeing. According to economist and strategist David Rosenberg, 2.5 years after the Fed begins to ease, the economy is usually generating about 150K jobs per month; job gains after a quarter of 5.9% GDP growth (like we saw in 4Q09) are usually about 215K per month.  The gulf between “what should be” and “what is” highlights the difficulty the economy’s government handlers will have getting it up off the mat.

CONSUMER CREDIT

Consumer credit outstanding rose in January for the first time in a year. Non-revolving credit, such as auto loans, actually rose 5.0% (a continuation of January’s 3.7% increase).  Revolving credit like credit cards fell at a much slower rate, dropping -2.3% on top of last month’s -12.9% plummet.  The decline reflects both consumer pay-downs and tightened credit standards.

GRAPH: Bloomberg

Feb 05th

Weekly Economic Insight: 1 Feb – 5 Feb 2010

Author: Kenn Lamson

Comments: 0

Two significant economic releases bookended the week: The stock market rallied solidly on Monday’s much better-than-expected ISM Manufacturing survey, while Friday’s unemployment figures saw a drop in the reported unemployment rate. Of special note within the Employment Situation report was the overstatement of job creation by the BLS’s Birth / Death Model between April 2008 and December 2009 to the tune of 1.184 million jobs. Despite its relatively small weight in the US economy, manufacturing appears to be leading the economy out of recession.  The consumer, however,  continues to retrench.

RELEASE
(leading, coincident, or lagging indicator)

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

ISM Manufacturing Index (leading)

 January 58.4 55.0 55.9 Manufacturing sector expanded for the sixth consecutive month in January, and accelerated from December.
Construction Spending (leading)

 December (MoM) -1.2% -0.5% -0.6% Construction spending continued its earlier downward trend. Downside acceleration in private residential spending was the primary culprit.
Consumer Spending (leading)

 December (MoM)

 0.2%

 0.3% 0.5% On an inflation-adjusted basis, MoM spending rose 0.1%.
ISM Non-manufacturing Composite (leading)

 January 50.5 51.0 49.8 The ISM’s non-manufacturing index rose slightly and moved into expansionary territory in December. The important new orders component grew for the fifth consecutive month.
Factory Orders (leading) December (MoM) 1.0% 0.5% 1.1% Orders for both durable and nondurable goods rose 1.0%.
Unemploy-ment Rate (lagging)

 January 9.7% 10.1% 10.0% Unemployment rate unexpectedly declined. According to the Household Survey the number of unemployed Americans declined by -430K to 14.8 million in January; this number has risen by 8.4 million since the official beginning of the recession in December 2007.
Nonfarm Payrolls (lagging)

 January -20K 0 -85K The seasonally adjusted data show a drop of -60K jobs in goods-producing businesses, versus a gain of 48K in service-providing businesses.
Consumer Credit (lagging) December -$1.8billion -$10.0 billion -$17.5 billion Consumer credit continued to decline in December, but by much less than was anticipated.

ISM MANUFACTURING INDEX

While it represents a relatively small percentage of the economy, this report clearly confirms an improving manufacturing sector.  This was the highest reading of the Index since August 2004.  Growth appeared in 13 of 16 industries surveyed.  Importantly, new orders accelerated for the seventh month and the order backlog grew for the first month. The employment component of the Index rose by three points into solidly positive territory, suggesting that manufacturers have reached their maximum productive capacity given existing resources and have begun to hire. Inventories remain extremely lean.

Level of ISM Manufacturing Index, 2004-date

CONSTRUCTION SPENDING

A -2.8% month-over-month decline in residential spending was the primary driver of December’s shortfall. Nonresidential construction spending rose 0.2% in December while government spending fell 1.2%.  For all of 2009, construction spending declined 12.4% from 2008.

Weakness in construction spending is a double-edged sword: Positively, a slower rate of construction makes it easier for the large volume of vacant, foreclosed or otherwise distressed homes and other buildings to be absorbed; negatively, however, continued contraction of this sector of the economy removes a potential driver of employment and incomes.  Clearly it’s unlikely that construction will be a broad-based engine of economic growth in the near future.

Month-over-month change in Construction Spending, 2005-date


CONSUMER SPENDING

On balance, consumer spending continued on its gradual uptrend, albeit (once again) at a slower rate than expected.  December’s increase was lead by spending on services, which gained 0.5% month-over-month.  Spending on durable goods was flat while spending on nondurables fell -0.6%. The personal savings rate increased from a revised 4.5% in November to 4.8% in December. We believe it’s exceptionally unlikely that the American consumer will resume spending at pre-recessionary levels anytime soon (perhaps for many years), given the elevated unemployment level and other sources of economic distress; however, stabilization and moderate growth in spending driven by increases in wages and employment while simultaneously reducing outstanding credit and raising the savings rate is our fervent hope.

Month-over-month change in Consumer Spending, 2005-date

ISM NON-MANUFACTURING INDEX

Although it failed to meet the consensus of analysts’ expectations, the Index shifted back above the 50.0 mark, indicating expansion of the critical service sector. Growth was seen in the “other services”, “information”, “utilities” and “wholesale trade” industries. Growth of the new orders component for the fifth consecutive month is also encouraging. However, the Index’s employment component showed a slower rate of contraction but remains at a dismal level.

Level of the ISM Non-manufacturing Index, 2005-date

FACTORY ORDERS

Growth in new orders was solid for both nondurable goods and durable ones in December. New order growth was strongest in construction machinery, power transmission equipment and metalworking machinery. Orders were weakest in nondefense aircraft & parts and defense communication equipment.  Basically an updated version of last week’s Durable Goods Orders release, the durable goods side of this series tends to be fairly volatile since it includes high value transportation items such as aircraft and ships.

Month-over-month change in Factory Orders, 2005-date

EMPLOYMENT SITUATION

The most closely-watched economic release of the week (and the month) was Friday’s Employment Situation. It’s somewhat confusing because it contains data from two surveys, the Household and the Establishment, that are conducted differently and therefore provide different estimates. Also, each Survey shows both Seasonally Adjusted and Not Seasonally Adjusted data, so getting a read on what’s actually happening is challenging. The “headline” numbers are the Unemployment Rate from the Household Survey and the Nonfarm Payrolls figure from the Establishment Survey, both of which are seasonally adjusted. For a broader discussion of the Employment Situation data, see our Economic Insight research entitled “Fun With Numbers” released 5 September 09.

Household Survey

Adjusted for seasonal variations, the Household Survey data showed that the number of unemployed persons fell by -430K during January, continuing the decline from prior months.  Full-time workers have declined by -4.0 million over the past year while part-time workers have increased by 100K. About 8.3 million Americans are employed part-time because of slack business conditions or because they could only find part-time work, down from 9.2 million in December.  Multiple job-holders rose slightly to 5.2% of the total employed. The average duration of unemployment extended another week to 30.2 weeks – about 7 months – with an alarming 41.2% of unemployed Americans remaining unemployed 27 weeks or longer. Because of the decline in the number of temporary and part-time workers, the broadest measure of unemployment, which includes “marginally attached” and “discouraged” workers, declined to 16.5% from 17.3% in December.

According to the Household Survey the unemployment rate for manufacturing jobs was 13.0%; for construction, 24.7%; agriculture, 21.3%; healthcare and education, 5.5%; and government, 4.3%.

TOP GRAPH: “Headline” (U-3) unemployment rate – white; broadest reported measure (U-6) – orange

BOTTOM GRAPH:  U-6 rate less U-3 rate

Establishment Survey

The seasonally adjusted Establishment Survey data showed a drop of -60K jobs in goods-producing businesses versus a gain of 48K jobs in service-providing businesses; notably, this report appears at odds with the ISM manufacturing and nonmanufacturing survey data cited above.

The Survey showed gains in many major private industry groups. Retail trade was reported to have added 42K jobs during January while temporary help services added 52K and motor vehicle & parts companies added 22.7K.  Meanwhile, the construction sector lost -75K and transportation & warehousing lost -19K.  Government employment totals fell by -8K.

Average hourly earnings were $22.45 in January, up $0.04 from December and $0.44 from a year ago. While increases from November varied by industry, year-over-year gains were broad-based, with declines in only a handful of industries.

The average work-week lengthened by 0.1 hours to 33.9 hours. The longest work-weeks were recorded in Mining & Logging (42.7 hours), Utilities (40.6 hours) and Durable Goods manufacturing (40.0 hours). The shortest hours were, unsurprisingly, in Leisure & Hospitality (25.6 hours), Retail (31.1 hours) and Education & Healthcare (32.7 hours).

Monthly change in nonfarm payrolls, 2005-date

Analysis

The Establishment Survey has a “large company” bias; the “birth/death model” is used to estimate the number of jobs created by small companies.  Given the importance of small businesses in our economy, we believe (and the historical record would suggest) that these firms are the “canary in the coalmine” of domestic economic activity, since they have less cash on the balance sheet, less access to credit, and less exposure to overseas markets than large companies. Consequently, we prefer to emphasize the Household Survey in our analyses.

There were enormous seasonal adjustments to Friday’s report. For instance, while the seasonally adjusted change in Establishment Survey payrolls was only -20K, the non-seasonally adjusted figure plummeted -2.819 million.

Also, revisions to the historical data were included with Friday’s report that make historical comparison difficult. Of special note was the overstatement of job creation by the BLS’s Birth / Death Model between April 2008 and December 2009 to the tune of 1.184 million jobs. Quoting our Economic Insight “Fun With Numbers”,  Harmonic feels compelled to question the usefulness of a model that creates from thin air a substantial number of jobs in a given month, in an environment in which companies that are too small or new to be officially surveyed may have difficulty finding financing.

Notwithstanding the huge seasonal adjustments and revisions that make drawing a conclusion difficult, Friday’s release is marginally positive:

  • The Household Survey’s reported seasonally-adjusted month-over-month decline of -430K in the number of unemployed Americans and an increase by 541K in the number employed.
  • The broadest measure of under- and unemployment declined sharply, predominantly due to a 10% decline in the number of Americans working part-time for economic reasons.
  • The length of the average work-week continued to creep higher, although it remains near its record low.
  • Average hourly earnings rose.

Additionally, the number of Americans considered “not in the labor force” fell by about 200K; the labor force participation rate rose from 64.6% to 64.7%.  However, the extremely long average period of unemployment is also of great concern.  It should further give one pause to note that the same number of Americans are now employed – 129.5 million – as in 1999, while the working-age population has increased by 29 million.

graph courtesy of CalculatedRiskBlog.com

CONSUMER CREDIT

Consumer credit outstanding dropped again in December, but nowhere near to the degree that was expected. Non-revolving credit, such as auto loans, actually rose 5.2% (a reversal of last month’s -6.1% decrease); in fact, auto sales were the strongest in December since August of last year.  Revolving credit like credit cards continued its precipitous decline, dropping -11.7% on top of last month’s -18.6% plummet.  The decline reflects both consumer pay-downs and tightened credit standards.

Consumer Credit outstanding, 2004-date

Jan 08th

Weekly Economic Insight: 4 January – 8 January

Author: Kenn Lamson

Comments: 0

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)
ISM Manufacturing Index (leading)

December

55.9

54.8

53.6

 Manufacturing sector continued to expand last month, and accelerated from November.
Construction Spending (leading)

November (MoM)

-0.60%

-0.50%

0.00%

 Construction spending resumed its earlier downward trend. A reversal in private residential spending from last month’s spike was the primary culprit.
Factory Orders (leading)

November

1.1%

0.4%

0.6%

 Orders for nondurable goods rose +1.8%, led by petroleum and coal products, while orders for durable goods rose 0.2%.
ISM Non-manufactur-ing Composite (leading)

December

50.1

50.4

48.7

 The ISM’s non-manufacturing index showed a reversal from November, with the Index rising but the important new orders component growing at a slower rate than previous months.
Unemploy-ment Rate (lagging)

December

10.00%

10.00%

10.00%

 Unemployment rate held steady. According to the Household Survey the number of unemployed Americans was 15.3 million in December; this number has risen by 7.6 million since the official beginning of the recession in December 2007.
Nonfarm Payrolls (lagging)

December

-85K

0

-11K

 The seasonally adjusted data show a drop of -81K jobs in goods-producing businesses, versus a loss of only -4000 in service-providing businesses. Average hourly earnings fell -$0.03 while the average workweek remained a very short 33.2 hours.
Consumer Credit (lagging)

November

($17.50 billion)

($5.00 billion)

($3.50 billion)

 Consumer credit plummeted in November. October’s figure was revised $0.7B lower, to -$4.2B.

ISM MANUFACTURING INDEX

Growth appeared in 9 of 16 industries surveyed.  Importantly, new orders accelerated sharply and the order backlog was flat. The employment index rose a full point, suggesting that manufacturers may have reached their maximum productive capacity given existing resources and have begun to hire. Inventories remain very lean.

CONSTRUCTION SPENDING

Residential spending fell alongside nonresidential and government spending.  Notably, October’s earlier estimate of no change was revised downward to a -0.5% drop.

FACTORY ORDERS

Growth in new orders was firmer for nondurable goods than durable ones in November. New order growth was strongest in industrial machinery, ships & boats, computers and iron & steel mills. Orders were weakest in nondefense aircraft and parts and defense communication equipment.  The durable goods side of this series tends to be fairly volatile since it includes high value transportation items such as aircraft and ships.

ISM NON-MANUFACTURING INDEX

The Index scratched its way back above 50, indicating a very slight expansion of the critical service sector. Continued expansion of the new orders component, albeit at the lowest level in 4 months, is encouraging; growth was seen in the agriculture, information, retail, healthcare, professional & technical, and public administration industries. However, the Index’s employment component showed a slower rate of contraction but remains at a dismal level.

EMPLOYMENT SITUATION

The most closely-watched economic release of the week (and the month) was today’s Employment Situation. It’s somewhat confusing because it contains data from two surveys, the Household and the Establishment, that are conducted differently and therefore provide different estimates. Also, each Survey shows both Seasonally Adjusted and Not Seasonally Adjusted data, so getting a read on what’s actually happening is challenging. The “headline” numbers are the Unemployment Rate from the Household Survey and the Nonfarm Payrolls figure from the Establishment Survey, both of which are seasonally adjusted. For a broader discussion of the Employment Situation data, see our Economic Insight research entitled “Fun With Numbers” released 5 September 09.

Household Survey

Adjusted for seasonal variations, the Household Survey data showed that the number of unemployed persons fell by -73K during December, continuing November’s decline.  According to this Survey the number of unemployed Americans has risen by 7.6 million since the beginning of the recession.  Companies have clearly shifted some work to from full-timers to part-timers; full-time workers have declined by -6.6 million over the past year while part-time workers have increased by 1.1 million. Multiple job-holders remained basically flat at about 5% of the total employed. The average duration of unemployment continued its rise, hitting 29.1 weeks – almost 7 months – with an alarming 39.8% of unemployed Americans remaining unemployed 27 weeks or longer. The broadest measure of unemployment, which includes “marginally attached” and “discouraged” workers, resumed its rise, to 17.3% from 17.2% in November.

According to the Household Survey the unemployment rate for manufacturing jobs was 11.9%; for construction, 22.7%; agriculture, 19.7%; healthcare and education, 5.6%; and government, 3.6%.

Establishment Survey

The seasonally adjusted Establishment Survey data showed a drop of -81K jobs in goods-producing businesses versus a loss of only -4000 jobs in service-providing businesses; notably, this report appears at odds with the ISM data cited above.  The Survey showed declines in many major private industry groups. However, Professional and Business Services grew by 50K, driven largely by a 46K increase in temporary help services, and Education and Healthcare rose 35K, with gains in most sub-industries. Interestingly, financial sector hiring also grew by 4000 jobs on the back of small gains in most sub-industries. Real estate, however, lost another -6100 jobs during the month.  Government employment totals fell by -21K, with declines in every state and Federal category outside of non-Postal Service Federal jobs.

The “birth/death” model used by the Bureau of Labor Statistics to estimate jobs created or lost by opening or closing firms “created” 59K jobs in October.

Average hourly earnings were $18.82 in December, down -$0.03 from November but up $0.42 from a year ago. While increases from November varied by industry, year-over-year gains were broad-based, with declines in only a handful of industries.

The average work-week remained very short on a historical basis, unchanged from November at 33.2 hours. The longest work-weeks were recorded in Mining & Logging (43.5 hours), Petroleum & Coal  Products (43.2 hours) and Primary Metals manufacturing (43.1 hours). The shortest hours were, unsurprisingly, in Leisure & Hospitality (24.8 hours), Retail (29.9 hours) and Education & Healthcare (32.3 hours).

Analysis

The Establishment Survey has a “large company” bias, which is why the “birth/death model” is used.  Given the importance of small businesses in our economy, we believe (and the historical record would suggest) that these businesses are the “canary in the coalmine” of domestic economic activity, since they have less cash on the balance sheet, less access to credit, and less exposure to overseas markets than large companies. Consequently, we prefer to emphasize the Household Survey in our analyses.

As with the November report, today’s release could be influenced more than usual by seasonal adjustment factors. Unemployment was accelerating during the 4Q08, which may have generated unusually high adjustments depending on the methodology the BLS uses.

Today’s release is unfortunately not the confirmation of improving employment for which we’d hoped. We cited several encouraging items in last month’s release; however, those points either reversed or were flat in December:

  • A seasonally-adjusted month-over-month loss of -589K jobs according to the Household Survey. Unadjusted for seasonal factors the drop was -1,179K.
  • The broadest measure of under- and unemployment resumed its increase.
  • The length of the average work-week remained unchanged at a near-record low.
  • Average hourly earnings fell.

Additionally, the number of Americans considered “not in the labor force” rose by about 840K; the labor force participation rate dropped from 64.9% to 64.6%.  The extremely long average period of unemployment is also of great concern and likely explains why so many seem to “drop out,” and also why the reported unemployment rate did not rise.

Harmonic continues to believe that employment is the linchpin of the economic cycle. When unemployment moderates so that consumers feel more secure, they’re likely to feel more comfortable spending in addition to saving. While some data, such as consumer spending, have shown recent “green shoots” we worry that without the support of income through private job creation debt levels will remain unsustainably high, delaying an organic and robust economic recovery.

Consumer Credit

Consumer credit outstanding plunged again in November; non-revolving credit, such as auto loans, fell -2.9% (a reversal of last month’s 2.4% increase) and revolving credit like credit cards continued its precipitous decline, dropping -18.5%.  The decline reflects both consumer pay-downs and tightened credit standards.

Dec 04th

Weekly Economic Insight, 30 November – 4 December

Author: Kenn Lamson

Comments: 0

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)
ISM Manufacturing Index (leading)

November

53.6

55.0

55.7

 Manufacturing sector continued to expand last month, although at a slower pace than in October.
Construction Spending (leading)

October (MoM)

0.00%

-0.40%

0.80%

 Construction spending was sharply higher than expected for October but a large downward revision to September (+0.8% to -1.6%) more than offset.
ISM Non-manufactur-ing Composite (leading)

November

48.7

52.0

50.6

 The ISM’s non-manufacturing index unexpectedly fell in November. Importantly, however, the new orders component of the Index continued to expand, albeit at a slower pace than in October.
Unemploy-ment Rate (lagging)

November

10.00%

10.20%

10.20%

 Unemployment rate unexpectely eased. According to the Household Survey the number of unemployed Americans reached 15.4 million in November; this number has risen by 7.9 million since the official beginning of the recession in December 2007.
Nonfarm Payrolls (lagging)

November

-11K

-100K

-190K

 The seasonally adjusted data show a drop in employment in all categories except Education & Healthcare, Government and Professional and Business Services. The “birth/death” model used by the Bureau of Labor Statistics to estimate jobs created or lost by opening or closing firms “created” 30K jobs in November.

ISM MANUFACTURING INDEX

Growth appeared in 13 of 16 industries surveyed.  Importantly, new orders accelerated, but the order backlog grew at a slower pace, as did production and employment. Inventories continued to be drawn down.  All in all, continued growth in manufacturing, which represents a small minority of US economic activity, is welcome, but it appears firms are using their improved efficiency to push more products out the door rather than hiring.

CONSTRUCTION SPENDING

Construction activity continues to diverge; residential spending grew (notwithstanding a large drop in September) but nonresidential and government spending fell.  Construction spending figures have followed this pattern since at least this past summer.

ISM NON-MANUFACTURING INDEX

The Index moved back below 50, indicating a contraction of the critical service sector. Continued expansion of the new orders component is encouraging; growth was seen in construction, information, healthcare and finance industries. However, the Index’s employment component remains dismal.

EMPLOYMENT SITUATION

The most closely-watched economic release of the week (and the month) was today’s Employment Situation. It’s somewhat confusing because it contains data from two surveys, the Household and the Establishment, that are conducted differently and therefore provide different estimates. Also, each Survey shows both Seasonally Adjusted and Not Seasonally Adjusted data, so getting a read on what’s actually happening is challenging. The “headline” numbers are the Unemployment Rate from the Household Survey and the Nonfarm Payrolls figure from the Establishment Survey, both of which are seasonally adjusted. For a broader discussion of the Employment Situation data, see our Economic Insight research entitled “Fun With Numbers” released 5 September 09.

Household Survey

Adjusted for seasonal variations, the Household Survey data showed that the number of unemployed persons fell by 325K during November, regaining some of October’s 558K rise.  According to this Survey the number of unemployed Americans has risen by 7.9 million since the beginning of the recession.  Companies have clearly shifted some work to from full-timers to part-timers; full-time workers have declined by 7.4 million over the past year while part-time workers have increased by 1.8 million. Multiple job-holders remained basically flat at about 5% of the total employed. The average duration of unemployment rose to 28.5 weeks – over 6 months – with an alarming 38.3% of unemployed Americans remaining unemployed 27 weeks or longer. The broadest measure of unemployment, which includes “marginally attached” and “discouraged” workers, fell to 17.2% from 17.5% in October.

According to the Household Survey the unemployment rate for manufacturing jobs rose to 12.5%, and for construction, to 19.4%. The unemployment rate for government workers was 3.4%.

Establishment Survey

The seasonally adjusted Establishment Survey data showed declines in all major private industry groups except Professional and Business Services (+86K, driven largely by increases in administrative businesses) and Education and Healthcare (+40K, with gains in all but one sub-category). Government employment totals rose slightly from October, with gains in Federal employment offsetting losses at the state level. The largest declines were in Construction (-60K) and Manufacturing (-41K).

The “birth/death” model used by the Bureau of Labor Statistics to estimate jobs created or lost by opening or closing firms “created” 30K jobs in October.

Positively, average hourly earnings rose to $18.74 in November, up $0.01 from October and $0.41 from a year ago. Gains were broad-based, with declines from year-ago earnings in only a handful of non-durable manufacturing industries.

The average work-week, while remaining very short on a historical basis, rose 0.2 hours to 33.2 hours. The longest work-weeks were recorded in Mining & Logging and Petroleum & Coal  Products (43.1 hours), Transportation Equipment (42.5 hours) and Paper Products (42.9 hours). The shortest hours were, unsurprisingly, in Leisure & Hospitality (24.7 hours), Retail (29.9 hours) and Education & Healthcare (32.1 hours).

Analysis

The Establishment Survey has a “large company” bias, which is why the “birth/death model” is used.  Given the importance of small businesses in our economy, we believe (and the historical record would suggest) that these businesses are the “canary in the coalmine” of domestic economic activity, since they have less cash on the balance sheet, less access to credit, and less exposure to overseas markets than large companies. Consequently, we prefer to emphasize the Household Survey in our analyses.

Today’s unexpectedly positive report could be due, in part, to seasonal adjustment factors. Unemployment was accelerating during the 4Q08, which may have generated unusually high adjustments depending on the methodology the BLS uses.

Today’s is the first monthly Employment Situation report we’ve felt contained even the smallest modicum of encouraging news.  While one month’s data clearly doesn’t suggest a trend, we’re encouraged by:

  • A seasonally-adjusted month-over-month gain of 227K jobs according to the Household Survey. Unadjusted for seasonal factors the gain was 44K.
  • The decline in the broadest measure of under- and unemployment.
  • Lengthening of the average work-week from the record low of the past two months.
  • A slow but continued rise in average hourly earnings.

Harmonic continues to believe that employment is the linchpin of the economic cycle. When unemployment moderates so that consumers feel more secure, they’re likely to feel more comfortable spending rather than saving. While consumer spending data have shown recent “green shoots” we worry that without the support of income through job creation debt levels will remain unsustainably high, delaying an organic and robust economic recovery.

Nov 06th

Weekly Economic Insight, 2 November – 6 November

Author: Kenn Lamson

Comments: 0

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)

ISM Manufacturing Index (leading)

October

55.70

53.00

52.60

Coincident and lagging indicators, not leading indicators, gave a big lift to the ISM’s manufacturing index last month.

Construction Spending (leading)

September (MoM)

0.80%

-0.20%

-0.10%

Construction spending was sharply higher than expected for September but a large downward revision to August was essentially offsetting.

ISM Non-manufactur-ing Composite (leading)

October

50.60

51.60

50.90

The ISM’s non-manufacturing index shows little change in month-to-month activity, pointing to fractional but still very welcome growth for the bulk of the nation’s businesses.

Consumer Credit (lagging)

September

$(14.80)

$(10.00)

$(12.00)

Between consumers sticking their money into savings and banks cutting back on loans, consumer credit continues to tighten.

Unemploy-ment Rate (lagging)

October

10.20%

9.90%

9.80%

Highest unemployment rate since 1983. According to the Household Survey the number of unemployed Americans reached 15.7 million in October; this number has risen by 8.2 million since the official beginning of the recession in December 2007.

Nonfarm Payrolls (lagging)

October

-190K

-175K

-219K

The seasonally adjusted data show a drop in employment in all categories except Education & Healthcare, Government and Professional and Business Services. The “birth/death” model used by the Bureau of Labor Statistics to estimate jobs created or lost by opening or closing firms “created” 86K jobs in October.

EMPLOYMENT SITUATION

The most closely-watched economic release of the week (and the month) was today’s Employment Situation. It’s somewhat confusing because it contains data from two surveys, the Household and the Establishment, that are conducted differently and therefore provide different estimates. Also, each Survey shows both Seasonally Adjusted and Not Seasonally Adjusted data, so getting a read on what’s actually happening is challenging. The “headline” numbers are the Unemployment Rate from the Household Survey and the Nonfarm Payrolls figure from the Establishment Survey, both of which are seasonally adjusted. For a broader discussion of the Employment Situation data, see our Economic Insight research entitled “Fun With Numbers” released 5 September 09.

Household Survey

Adjusted for seasonal variations, the Household Survey data showed that the number of unemployed persons rose by 558K during October, by 6.4 million over the past year and by 15.7 million since the beginning of the recession. Companies have clearly shifted some work to from full-timers to part-timers; full-time workers have declined by 8.5 million over the past year while part-time workers have increased by 2.1 million. Multiple job-holders remained basically flat at about 5% of the total employed. The average duration of unemployment rose to 26.2 weeks – over 6 months – with an alarming 35.6% of unemployed Americans falling in that category. The broadest measure of unemployment, which includes “marginally attached” and “discouraged” workers rose to 17.5% in October from 17.0% in September.

According to the Household Survey the unemployment rates for natural resource, construction and maintenance professions rose to 15.5%, with construction hitting 19.1%. The unemployment rate for production, transportation and material moving occupations rose to 13.0% .

Establishment Survey

The seasonally adjusted Establishment Survey data showed declines in all major industry groups except Professional and Business Services (+18K, driven largely by increases in administrative businesses) and Education and Healthcare (+45K, with gains in all but one sub-category). Government employment totals were unchanged from September, with gains in Federal employment offset by losses at the state level. The largest declines were in Construction (-62K) and Manufacturing (-61K).

The “birth/death” model used by the Bureau of Labor Statistics to estimate jobs created or lost by opening or closing firms “created” 86K jobs in October.

Positively, average hourly earnings rose to $18.72 in October, up $0.04 from September and $0.45 from a year ago. Gains were broad-based, with declines from year-ago earnings in only a handful of non-durable manufacturing industries.

However, the average work-week remained very short, at around 33 hours. The longest work-weeks were recorded in Mining & Logging and Petroleum & Coal Products (43.5 hours), Transportation Equipment (42.8 hours) and Paper Products (42.4 hours). The shortest hours were, unsurprisingly, in Leisure & Hospitality (24.4 hours), Retail (29.8 hours) and Education & Healthcare (32.2 hours).

Analysis

The Establishment Survey has a “large company” bias, which is why the “birth/death model” is used. Given the importance of small businesses in our economy, we believe (and the historical record would suggest) that these businesses are the “canary in the coalmine” of domestic economic activity, since they have less cash on the balance sheet, less access to credit, and less exposure to overseas markets than large companies. As noted above, the Household Survey, which captures small companies, showed a seasonally adjusted decline of -558K jobs last month, compared to the -190K loss reported in the Establishment Survey. We will watch for improvement in the Household Survey, which should lead the Establishment Survey, before we become more sanguine about the employment situation.

Harmonic continues to believe that employment is the linchpin of the economic cycle. When unemployment moderates so that consumers feel more secure, they’re likely to feel more comfortable spending rather than saving. While consumer spending data have shown recent “green shoots” we worry that without the support of income through job creation debt levels will remain unsustainably high, delaying an organic and robust economic recovery.

ISM MANUFACTURING

This Index grew for the third consecutive month after 18 months of declines. The production component rose a strong 7.6% to 63.3 in October; however, new orders slumped 2.3% to 58.5. Expansion is indicated by readings >50.

Analysis

This Index is sensitive to exports, which have been greatly aided by the declining value of the US Dollar. The growth in the employment component of this Index is inconsistent with the contraction seen in today’s Employment Situation data. Those economists predicting a sharp economic rebound on the basis of strength in this Index, a component of which is a part of the Leading Economic Indicators, are mislead; unlike other post-WW2 recessions, this one is driven by the unwinding of excessive debt and a faltering banking system. The comparisons are simply not apt.

CONSTRUCTION SPENDING

The boost in spending in September was led by a 3.8 percent surge in private residential outlays. Private nonresidential declined 1.8 percent and public outlays decreased 0.1 percent in the latest month.

Analysis

Although housing may be on a slight uptrend, the nonresidential and public sectors are still in recession and it may be some time before they turn up. Very weak employment in the sector notwithstanding, a low level of residential construction is not necessarily a bad thing, given the enormous inventory of homes available for sale.

ISM NON-MANUFACTURING

This service sector Index provides a good read on the state of domestic demand, since most US services are consumed domestically. It grew for the second consecutive month but at a slower than expected rate. Services represent about 80% of the US economy.

The business conditions index, akin to a production index, showed a stronger rate of month-to-month growth, at 55.2 for a 1 tenth gain. The new orders index offers even better news, up 1.4 points to a very solid 55.6. This index, in contrast to the ISM’s new orders index on the manufacturing side, is accelerating and will hopefully continue to accelerate in the months ahead. Order backlogs were also higher, up 2 points to 53.5. However, the employment index fell more than 3 points to 41.1.

Analysis

Arguably more important than the Manufacturing Index because of the proportion of services in the economy and the domestic nature of demand for them, this Index is considerably weaker than its Manufacturing counterpart.

CONSUMER CREDIT

Revolving credit, mostly credit cards, fell a whopping $9.9 billion (-13.3%) from August, with non-revolving, mostly car loans, down $4.9 billion (-3.7%) month-over-month.

Analysis

While consumer spending is one of the main engines of US economic activity, that much of that spending was done on credit is precisely the genesis of much of our current discomfort. While short-term thinking bemoans the reduction in credit, a broader view suggests that debt reduction to more sustainable levels is an appropriate thing for a healthy economy. Readers may recall that consumer spending has not declined to nearly the degree consumer credit has, begging the question how spending may remain stable or rise while savings rises and credit outstanding falls.

Oct 09th

Weekly Economic Insight, 5 October — 9 October

Author: Kenn Lamson

Comments: 0

Last week’s deluge of economic data was followed, thankfully, by only a trickle this week.

 

 

RELEASE PERIOD ACTUAL EXPECTED (consensus) LAST HIA COMMENT
(leading, coincident, or lagging indicator)
Consumer Credit (lagging) August  $(12.00)  $       (10.00)  $(21.60) Non-revolving credit declined much less than prior months, probably due to “Cash-for-Clunkers”. Revolving credit, however, dropped nearly 8% YoY, the largest decline on record.
ISM Non-manufactur-ing Composite (leading) September      50.90             50.00      48.40 In contrast to the manufacturing segment reported last week, service industries, which comprise a substantial majority of US businesses, expanded in September for the first time in a year.
Trade Balance (lagging) August   -$33B -$32B The trade deficit narrowed for the first time in 4 months as exports rose to their highest levels in a year and imports eased.

 

Consumers continued to reduce debt at a rapid pace in August, with revolving balances like credit cards seeing a 13% annualized decline.

 

We continue to scratch our respective follicly-challenged heads over how consumer spending (reported last week) has risen while consumer credit has dropped precipitously and savings balances rise. One conjecture we propose is that consumers may be liquidating assets from their personal balance sheets, using the proceeds to increase savings or spend.

 

It’s encouraging to see the services component of the ISM data rise above 50.0, the dividing line between growth and contraction, especially given the dominance of service industries in the US economy.

 

 

Oct 05th

Weekly Economic Insight, 28 September – 2 October

Author: Kenn Lamson

Comments: 0

Given the volume of economic data released last week, my absence from our office last Thursday and Friday to attend my 25th (!) high school reunion and again Monday due to illness, I hope readers will forgive the tardiness of our weekly recap.

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)

S&P Case-Shiller 20-city Home Price Index (lagging)

July

144.23

NA

141.86

Case-Shiller reported a third month of gains for home sale prices. The composite-20 index rose 1.6 percent in July. With the exception of Las Vegas, all metro areas showed gains or flat conditions. Year-on-year rates also improved for a third month, now at minus 13.3 percent for the 20-city Index. Rates of decline in California have definitely come down, now showing year-on-year declines in the mid-teens vs. 20 percent and worse declines earlier in the year. These are exhaustive data but do lag, which is a concern given set backs in new and existing home prices during August.

Consumer Confidence (leading)

September

53.10

57.00

54.10

Consumer confidence deteriorated in September according to the Conference Board’s index. The worse news in the report is the current assessment of the labor market with substantially more saying jobs are hard to get, 47.0 percent vs. 44.3 percent, versus those saying jobs are plentiful, a miniscule 3.4 percent vs. August’s 4.3 percent. This reading indicates bottom line pessimism and points to weak retail sales in the months ahead. The one positive in the report is a continued decline in inflation expectations, at 5.2 percent vs. August’s 5.4 percent and a reflection of lower gasoline prices.

GDP (lagging)

2Q09

-0.7%

-1.2%

-1.0%

We are very much looking in the rear view mirror at this point. But the third estimate for second quarter GDP clearly shows the economy at recession bottom-with the weight of the evidence of more recent data arguing that the recession technically is over. And the component mix for second quarter GDP adds to the argument that the third quarter will be moderately positive. The upward revision was primarily due to higher estimates for business spending on software and nonresidential construction. The latest GDP numbers show the economy at recession bottom with increased likelihood that there will be an inventory boost in the third quarter, resulting in a moderately positive number for overall GDP.

Corporate Profits (lagging)

2Q09

-19.2%

NA

-17.7%

Corporate profits in the second quarter were revised down slightly to an annualized $1.031 trillion from the original estimate of $1.050 trillion and in comparison to the first quarter’s $0.976 trillion. Profits in the second quarter were up an annualized 24.5 percent, following an 85.1 percent surge the previous quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are down 19.2 percent on a year-on-year basis, compared to down 24.8 percent in the first quarter.

Consumer Spending (leading)

August (MoM)

1.3%

1.1%

0.2%

While everyone expected spending to be up due to a surge in motor vehicle sales, unexpected good news was that consumers were spreading some cash around elsewhere, too. Once again, strength was in durables, which jumped 5.3 percent on sharply higher motor vehicle sales. Nondurables were robust also with a 2.3 percent boost while services advanced 0.4 percent.

ISM Manufacturing Index (leading)

September

52.60

53.50

52.90

The ISM’s index points to slow, steady expansion in the manufacturing sector. At 52.6, it’s little changed from August’s 52.9 and is still over 50 indicating that more purchasers are reporting expansion rather than contraction. New orders slowed but still remain very strong, at 60.8 vs. 64.9. Production also slowed, down more than 6 points to 55.7 still indicating a month-to-month increase for manufacturing sales. Employment is steady, little changed at 46.2 and pointing to continued but moderate layoffs. Inventories gave the index a big boost, up more than 8 points to 42.5 to indicate that manufacturers are slowing their draws, the result of production needs and also business planning for continued production needs ahead.

Construction Spending (leading)

August (MoM)

0.80%

-0.10%

-0.20%

The construction sector is seeing notably divergent trends. The good news is that housing is on an uptrend, but nonresidential and government construction outlays are headed in the opposite direction. The boost in spending in August was led by a 4.7 percent jump in private residential outlays. In contrast, private nonresidential slipped 0.1 percent and public outlays dropped 1.1 percent in August.

Unemploy-ment Rate (lagging)

September

9.80%

9.80%

9.70%

The civilian unemployment rate continued its uptrend. The latest rate is the highest since 1983. The U-6 unemployment rate, which includes those who are underemployed or have stopped looking for work, rose from 16.8% to 17.0%.

Nonfarm Payrolls (lagging)

September

-263K

-170K

-216K

The September jobs report was disappointing. August and July revisions were down a net 13,000 (the net declines were worse). By major categories, goods-producing jobs decreased 116,000 in September, following a 132,000 drop the month before. In the latest month, construction jobs fell 64,000 while manufacturing declined 51,000 and mining slipped 1,000. Service-providing losses, however, surged back to a 147,000 fall, after contracting only 69,000 in August. The drop in service-providing jobs was led by trade & transportation, down 60,000, and by government, down 53,000. Trade was tugged down mainly by retail jobs which fell 39,000. Government weakness was led by the non-education component of local government, down 24,000, as revenue shortfalls have forced job cuts despite fiscal stimulus monies. Since the start of the recession in December 2007, payroll employment has fallen by 7.2 million.

We continue to watch the apparent dichotomy between rising consumer spending and declining consumer confidence. One must wonder, with savings continuing to climb and credit balances falling, from where are these monies coming and how sustainable is the increase in spending, particularly on durable goods?

As noted in the table, we expect a slightly positive GDP 3Q09 figure. It’s worth mentioning that the year-over-year percentages become somewhat misleading in that they’re showing growth from substantially lower absolute levels. Also, there’s no guarantee that growth won’t slow again as the stimulus funds are used up.

As we’ve noted in earlier missives, corporate profits in recent quarters have largely been driven by expense reduction, not revenue growth. While in a given quarter, as my business partner says, a dollar of expense cuts is as good as a dollar of sales, clearly driving earnings by slashing costs is an unsustainable longer term strategy. The silver lining is that with much lower expense bases, when the recovery appears, companies will have much greater operating leverage. We will be watching very closely for signs of revenue growth as 3Q09 earnings are announced in coming weeks.

The flip-side of the corporate profits data is, of course, the unemployment figures. We found the reports disheartening, but note that the consensus remains too bullish on both the economy and equity market in our view. With an average workweek of only 33 hours (which declined from 33.1 hours last month) and the U-6 rate at 17.0% (up from 16.8% last month), companies will first lengthen workdays and convert temp employees to permanent ones before actually hiring. The corollary to this situation is that there’s no evidence to suggest wage inflation in the foreseeable future, yet another reason our belief is that we are in a deflationary spiral, not an inflationary one.

Sep 04th

Weekly Economic Insight, 31 August – 4 September

Author: Kenn Lamson

Comments: 0

This week’s major economic releases were mixed with respect to consensus expectations and their boding for the US economy.

 

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

ISM Manufacturing Index

August

52.9

50.5

48.9

Index readings >50.0 indicate expansion of US manufacturing activity.  The Index is tentatively signaling that the factory sector has begun to expand, a view which is reinforced by the observation that historically the ISM manufacturing index rises above the critical 50.0 level after a recession’s end.  Many global manufacturing indices are also suggesting renewed expansion.

Construction Spending

July (MoM)

-0.2%

-0.1%

0.3%

Large seasonal adjustments should inspire low confidence in the accuracy of this series; the -0.2% monthly figure has a 1.6% margin of error. That said, private residential construction, arguably the most important component of this release, rose 2.3% from June. It remains to be seen whether this growth marks the beginning of a new trend.

Factory Orders

July

1.3%

2.2%

0.9%

Orders for manufactured goods have risen 5 of the past 6 months. Shipments also rose, but unfilled orders and inventories declined, suggesting manufacturers are simply allowing production to keep pace with orders and are not increasing production beyond near-term demand.

Change in Nonfarm Payrolls

August

-216,000

-230,000

-276,000

The pace of job losses continues to moderate. About 7.4 million jobs have been lost since the recession officially began in December 2007.  Every economic sector except healthcare saw continued but smaller losses compared to previous months. Positively, average hourly earnings rose 2.6%.  The average workweek was unchanged.

Unemployment Rate

August

9.7%

9.5%

9.4%

The unemployment rate rose largely because of population growth; the size of the seasonally-adjusted labor force remained essentially unchanged.  The broadest measure of un- and under-employment, which includes those that are involuntarily working part-time and those who’ve effectively given up looking for work, rose to a new cycle high of 16.8%.

SOURCE: BLOOMBERG LLC

 

The potential recovery of the global manufacturing sector is a significant positive for the ultimate exit from recession, more so for less consumer-driven economies than the US’s. Nonetheless, the stabilization of this segment of the US economy indirectly supports improvement in employment and other consumer data.

 

The housing market, while showing tentative signs of life not evident even a few months ago, remains moribund by most measures. Whether July’s growth in private residential construction is a positive, given the enormous overhang of unsold new and existing homes and the potential for a secondary wave of foreclosed properties to hit the market, is certainly a point for debate.

 

The unemployment situation is a key factor in Harmonic’s US economic outlook. While the unemployment statistics have historically been a lagging indicator of the economy, the combination of the consumer’s dominant place in our economy and the ongoing debt/deflationary spiral makes the jobs data a leading indicator of the broader economy, we believe.

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