Treading Water
Raymond James
By Scott J. Brown
December 5, 2011
The good news is that the economy does not appear to be contracting. The bad news is that it’s still not growing fast enough to make up much of the ground lost during the downturn. The unemployment rate fell to 8.6% in November, from 9.0% in October and 9.8% a year ago. However, more than half of that drop was due to a decrease in labor force participation. The data suggest an economy that is growing just enough to absorb the growth in the working-age population.
The unemployment rate has trended lower over the last couple of years now, but the decrease overstates the degree of improvement. As individuals exhaust their unemployment insurance benefits, they have a tendency to give up looking for a job (which is a requirement to receive benefits). Hence, they are no longer officially counted as unemployed. The employment-population ratio is not subject to these kinds of shifts in labor force participation. The employment-population ratio has rise modestly in recent months and has exhibited a relatively flat trend over the last couple of years.
Nonfarm payrolls rose about as expected last month, with a net +72,000 revision to the two previous months – a 110,000 monthly pace over the last six months and up 1.2% year-over-year. That’s not bad, but we’d really like to see gains on the order of 250,000 to 300,000 per month, every month, for three or four years. That excess slack in the labor market represents a huge loss relative to potential output. The labor market slack also puts downward pressure on wages. Average hourly earnings growth has been relatively meager over the last 12 months – far below the rate of inflation. So, the typical worker is running face just to keep in the same place and is not doing a good job of that. Food and energy prices are likely to moderate, cooling the overall inflation figures, but real wages are likely to remain relatively soft over the near term. State and local government subtracted 16,000, and the pace of decline should be slowing a tax revenues continue their gradual recovery.
The ADP estimate of private-sector job growth (+206,000 in December) was stronger than the official BLS data. The ADP figures have a breakdown by size of firm. Payrolls at large firms aren’t growing much, but they’re not contracting either. Most of the job growth in an expansion is going to come from small and medium-sized firms, which have seen moderate growth in recent months and were better in November.
Europe: Stock market participants were encouraged last week by central bank efforts to boost U.S. dollar liquidity, and the possibility that liquidity may be increased in other currencies (principally, the euro). In lowering the costs of dollar swaps between central banks, the move is a preemptive step by central banks to prevent the financial gears from seizing up, as they did in the crisis of three years ago. This does not go to the root of Europe’s problems, but should help reduce the potential strains if the situation in Europe worsens. Note that these central banks also boosted dollar liquidity in September, 2008 – which, while initially taken as a positive by the markets, didn’t prevent troubled financial market conditions that autumn.
A key flaw in the euro zone construction was the lack of a fiscal authority for all of Europe. Leaders there are now working on a fiscal compact, which if its credible, could lead to more support from the European Central Bank. Many economists believe that greater participation by the ECB is a necessary component if the euro is to be saved. Last week, ECB President Draghi said that a new fiscal compact is needed, one that includes a fundamental restatement of the fiscal rules and some enforcement of mutual commitments already made. He said that “other elements may follow” (implicitly, more help from the ECB). Bottom line: we need to see action on a fiscal compact agreement this week.
(c) Raymond James
