Friday's employment report from the Bureau of Labor Statistics, which showed the official unemployment rate decreasing for the first time in over a year, was hailed by markets, with the S&P 500 crossing the "psychologically significant"--whatever that means--threshold of 1,000 points on Friday. Given the recent uptick in the Case-Shiller index, which revealed that house price declines may be leveling off at long last, and the prevalence of second-quarter corporate earnings surprises on the upside, some are talking about the economy emerging from recession, possibly even in the current quarter. But we've heard this story before: only a few weeks back, talk of "green shoots" ended in tears with June's awful employment report. So what are we to make of the current conjuncture?
Looking at the labor statistics alone, the picture is mixed, at best. On the plus side, job losses for July, at 247,000, were far, far lower than the expected 350,000. Even the U5 and U6 measures of unemployment, which attempt to include underemployed persons, finally fell back (but remained at very high levels, comprising almost 30 million people). And the work week, which had plumbed depths unseen since records began in 1964, finally recorded an increase. In fact, the manufacturing work week reached its highest level of the year, as inventories were built up after the complete collapse of working capital stocks and trade finance last autumn. Needless to say, much of the hiring was in the government sector, as stimulus programs got up and running. Temporary agencies, however, which had seen large cutbacks in personnel, saw a pronounced slowdown in cuts as more assignments were extended.
More ambiguously, health care and leisure and hospitality, two of the best performers in recent years, were the only categories in which there were no net losses in jobs. But the increase in health care was less than that registered a year ago, while the numbers from leisure and hospitality were essentially flat.
On the minus side, the reversal in the unemployment rate was ultimately dependent on the fact that some 422,000 people were taken out of the labor force altogether (many were classified as discouraged workers who, having become jobless, and no longer looking for work--out of frustration with dwindling job vacancies--are not considered part of the labor force by government statisticians). As The
' Edward Luce noted, if these people had remained in the labor force, the unemployment rate would have hit 9.7%, which was about the level foreseen by many economists. In one of the most forbidding sentences I have read in the press for some time, Luce then attempted to describe the significance of this development: "However, the drop in labor force numbers in July mirrors a rise in the number of people looking for work earlier in the year, which then exaggerated the rise in unemployment, which leapt by more than 500,000 in each of the months between February and May." Ouch.
Meanwhile, in the private sector, job losses, far from reversing, are merely slowing down. And even the welcome increase in hours worked may be a quirk: as Dean Baker noted,
So, the employment picture is, as stated before, mixed at best. Beyond that, there are several reasons to avoid undue optimism. First of all, even the impressive profit performances put in by many companies during this reporting season is the result of one thing, and one thing alone: savage cost-cutting. Revenues remain dormant, and pronounced weakness on the wages front will no doubt deter spending sprees on the part of anxious consumers already shell-shocked by the bloodletting on the labor market. And if this weren't bad enough, credit card delinquencies are rising steadily, which means that further cutbacks in spending are to be expected. And, lest we forget, home foreclosures continue their relentless advance, which augurs poorly for both the housing sector (which must revive if the toxic assets remaining on banks' balance sheets are to find a floor, and which might allow for a sustainable economic recovery) and consumer spending.
Some developments abroad appear more hopeful. Recent export numbers out of Germany and of industrial production in Japan have been excellent. But China presents a more troubling outlook. China's extraordinary economic stimulus, which far outpaces that of the US and other Western countries as a percentage of GDP, and is without doubt one of the two most important reasons why the global financial system didn't collapse altogether last autumn (the other being taxpayer-funded Western bank recapitalizations), has been dependent on a level of bank lending that is truly frightening. Analysts say the level of lending has increased to a level three times higher than that of last year, and fear that much of the money lent has been spent on punts in the Chinese stock markets (which are up 84% this year, surprisingly enough), or in real estate. As a result, the Chinese authorities are attempting to rein in the pace of lending (one major lender, The China Construction Bank, plans a pullback of no less than 70%), and this has meant that China's stock markets, almost alone in the world, fell for much of last week (including Friday, when the US labor data buoyed markets just about everywhere else). And expectations that many of these loans will be duds have increased amongst many observers of the Chinese scene.
So the mixed employment picture, coupled with the problematic--to put it politely-- nature of Chinese growth, suggest that the optimists are once again getting ahead of themselves. Given the crazy nature of this conjuncture, however, it may not take the bursting of the Chinese bubble or anything of that sort to put a damper on this putative recovery. More likely, increased risk taking will lower the dollar and that will lead to rises in commodity prices, which will then nudge longer-term interest rates up until the monetary authorities are forced to speak of exit strategies again, which will clinch the deal. Or maybe another terrible employment report will do the trick?
Larry Peterson