Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

Read More

While public attention has been riveted on the debt ceiling drama and its aftermath, the economy has been slipping quietly backward toward recession’s edge.

The evidence of a double dip, unsettling but inconsistent earlier this year, has become more persuasive with a succession of reports making it more difficult to dismiss signs of weakness as temporary blips on the recovery path.

Last week’s employment report provided a welcome and unexpected jolt of good news, as employers added 116,000 workers to their payrolls and the unemployment rate fell from 9.2 percent to 9.1 percent – a much better performance than analysts had predicted.

“This report suggests an economy that is still growing, so we’re not in a recession, but one that is definitely sub-par,” Scott Brown, chief economist at Raymond James & Associates Inc., told Bloomberg Television. “The bottom line is that we’re not really seeing any signs that we’re in a recession just yet.”

Other reports suggest that the economy has been moving closer to a recession, if it hasn’t as yet tumbled into one. Before the employment report dialed concerns back a notch, the stock market had plunged into “correction” territory, as key indicators had turned firmly and unmistakably negative and the debt ceiling deal hammered out in Washington had erased hope of significant federal stimulus that might help reverse that trend:

  • Gross Domestic Product (GDP) increased by only 1.3 percent in the second quarter after barely registering a pulse with a 0.4 percent increase in the first quarter, according to the Commerce Department report. Revisions to earlier data confirmed what millions of unemployed workers already knew – the recession was steeper than previously estimated. The nation’s GDP declined by 5.1 percent -- not 4.1 percent-- between the fourth quarter of 2007, when the downturn began and the second quarter of 2009, when analysts determined that it ended.
  • Manufacturing activity, which has paced the economic recovery until now, slowed markedly in July, pushing the Institute for Supply Management’s (ISM’s) manufacturing index down to 50.9 from 55.3 in June, the lowest reading for this barometer since July, 2009. Economists, who had expected continued growth in this sector, termed the performance “shockingly weak” and evidence that the slowing noted earlier in the year was not the temporary setback most had assumed it to be.
  • Orders for durable goods conveyed the same disappointing message, declining by 2.1 percent after posting a smaller than anticipated 1.9 percent gain in June.
  • The service sector also lost momentum in July. ISM’s index of non-manufacturing businesses, covering about 90 percent of the economy, declined from 53.3 in June to 52.7 in July, its lowest reading since February of last year.
  • Consumer confidence has been trending downward, but erratically, with the two key indicators moving once again in opposite directions. The Conference Board’s confidence index increased from an eight-month low in July, rising to 59.5 from 57.6 in June, as a decline in gasoline prices and a more optimistic view of future job prospects – preceding the most recent glum report -- apparently offset anxiety created by the debt ceiling wrangling in Washington. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment, on the other hand, fell to a two-year low in July, reflecting what analysts say is a more realistic reading of the economic outlook, echoed by Bloomberg’s Comfort index, which fell to 47.6 the last week in July, its lowest point since May.
  • Consumer spending fell by 0.2 percent in June following a weak (0.1 percent) gain in May, as unemployment remained stubbornly high, wages remained flat, and consumers with jobs grew more concerned about keeping them. The savings rate climbed to 5.4 percent from 5 percent, reaching its highest level since September of last year.

Ongoing Uncertainty

“Wages are very stagnant and that’s affecting consumer spending and consumer confidence,” Federal Reserve Chairman Ben Bernanke told Congress in his semi-annual report on the economy. “There is also ongoing uncertainty about the durability of the recovery,” Bernanke added, noting that the Fed is prepared to act (presumably with bond purchases) if the economy falters.

The uncertainty Bernanke described is widely shared by economists, many of whom see an increasing risk that another recession will follow close on the heels of the recent one, which hasn’t as yet generated much of recovery.

Harvard economist Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, which pegs the beginning and end of recessions, puts the odds of another downturn now at about 50 percent. “The economy is really balanced on the edge,” he told Bloomberg News.

If the recovery is hanging on by its fingertips, the eleventh hour debt ceiling deal Congressional leaders and President Obama negotiated (with its mandate for deep spending cuts) represents a steel-toed boot about to land on its knuckles, economists on both sides of the partisan divide agree.

“The agreement would mean the government has less money to provide employment opportunities for the 9.2 percent of Americans looking for jobs. It would probably cut aid to states, whose own cuts are contributing to the weak economy, and eliminate at least $350 billion from the defense budget, prompting layoffs at government contractors,” a Washington Post analysis warned.

A Housing Swamp

Housing meanwhile, remains mired in a swamp that continues to drag sales and prices down. The S&P/Case-Shiller home price index for May recorded its largest year-over-year decline (4.5 percent) since November of 2009. Prices rose slightly compared with the previous month, but analysts attributed the gain to seasonal trends rather than a sign of improvement in housing fundamentals. Negative equity, they noted, remains a serious drag on prices, making it difficult for many owners to sell their homes and discouraging many prospective buyers from purchasing them.

In a recent telephone survey, more than 50 percent of homeowners said they think they are underwater on their mortgages – up from 45 percent in June and a far cry from December, 2008, when more than 60 percent of respondents were confident they had equity in their homes.

A report by CoreLogic cites a recent decline in distressed property sales as evidence that home prices may be stabilizing. But even so, the report emphasizes, many of the owners who are underwater on their homes will remain in that position “for an extended period of time, which will result in a long tail of mortgage distress.”

Home sales continue to set or equal negative records. Existing home sales fell again in June for the third consecutive month, putting the sales level 9 percent below the same period last year and on a pace to produce the lowest annual total since 1997.

A Slim Peg

Pending sales, based on contracts signed but not yet closed, increased by 2.4 percent, building on an 8.32 percent May gain in the National Association of Realtors’ (NAR’s) monthly barometer of future sales activity. But the increasing risk of aborted transactions (the contract cancellation rate jumped to 16 percent in June, according to the NAR) makes this forward indicator a slim peg on which to hang hopes of a significant housing rebound in the making.

New home sales also declined in June, but a decline in inventory levels and an increase in new home prices spurred hope among some industry executives that this segment of the market may finally be poised for a rebound. With new home construction at a virtual standstill for the past two years, the current inventory of new homes for sale has fallen to 6.3 months – the lowest level since April of 2010.

Patrick Newport, U.S. Economist at HIS Global Insight, finds that statistic encouraging. “Certainly we’re not out of the woods yet,” he told Builder on Line. “More inventory will need to clear and sales will need to firm.” Although this does not represent “the turn” in housing, Newport agreed, "the drivers are finally reaching for the turn signal….A turnaround is coming,” he added, “but not today.”